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Editorial
Tax law should be fairer and clearer
The contraction of the stock market has left many bodies in its wake, especially those who watched the value of their shares plummet. Some of these maligned investors have also discovered that they not only lost money on an investment, but they also owe taxes on profits they say they never received.
Many people who received stock options as a form of compensation from their employer have become very familiar with the relatively unknown and complicated Alternative Minimum Tax or AMT.
The AMT supersedes regular income tax calculations under certain conditions, including when a taxpayer exercises stock options in one calendar year and holds onto the stock into the next year.
For example, if an employee exercised an option to buy a $100 stock for $1 in 2000--thereby realizing a $99 gain, at least on paper--then held onto the stock into 2001, the employee would owe tax on that $99 gain.
If the stock retains its value, the taxpayer can merely sell the stock and surrender a portion of the proceeds to Uncle Sam. But those who held on to a stock that lost its value discovered they were taxed on their original "gain." This profit is based on the value of the stock on the day the option was exercised. Of course, in some cases, this value is long gone, swallowed up by an economic downturn that ravaged stock prices, especially for many technology companies in Silicon Valley.
Zoe Lofgren, who represents a portion of Silicon Valley in the U.S. House of Representatives, is trying to introduce legislation to correct this perceived injustice. Her bill, HR 1487, would only allow actual gains to be taxed rather than paper profits. Also, this new bill would be retroactive to the year 2000, essentially granting amnesty to the many stock optioners who say they are unsuspecting victims of the AMT.
The AMT obviously needs to be reworked and brought up to date to accommodate increases in the cost of living since the tax was enacted in 1969. A high income back then is considered middle-class nowadays.
What is less clear is who deserves amnesty, if anyone. Who was a dupe in the AMT Scare of 2001 and who was being greedy? Many people are pointing fingers at their accountants, tax advisors and even the nation's capital gains tax that rewards investors for adopting a buy-and-hold mentality.
Obviously, confusion reigned. But an old saying says a bird in the hand is better than two in the bush. Those optioners could have easily transformed their paper profit into dollars and cents, paid their tax and banked a tidy--in some cases, humongous--profit. Instead, they assumed their stock would appreciate, or at least stay the same price.
Many losers in this game say they were holding out to take advantage of a lower capital gains rate. Yet they had to know that the value of their investment was at the mercy of the stock market, which is always a gamble. That's why its a market and not a bank.
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Los Gatos, California Since 1881
