Does anyone here know the tax situation on these RSUs that facebook gives?
If people do it through an 83(b) election, aren't these RSUs supposed to be taxed as cash at the second of grant? (but if forfeited, that tax is lost?) - That would be horrible.
If people don't do a 83(b), then it is taxed at vesting - so it's just equivalent to a cash bonus at exercise (and taxed the same) - but if that's the case, how has anyone ever thought it was anything other than a cash bonus (determined at bonus time by a constant C*company value for some C, which appears in your employment contract, but is otherwise arbitrary and can be changed arbitrarily at any point before grant by the company)
Wouldn't you want the clock to start at the second of grant so that appreciation would be long-term capital gains sooner? Although I can see how it would cause a cashflow problem in the short term.
If the shares are worth $38 at grant, you are paying taxes based on the $38 value if you do an 83b.
if the stock price goes up, you are golden, as you started your long-term capital gains clock earlier.
But what if the stock price goes down? Then you just paid taxes based on a $38 share price, and ended up with shares worth just $18. If the stock price goes down a lot, you may end up paying more in taxes than the value of the shares themselves
(b) sold all your shares (was practically impossible for FB employees before 2nd market and friends came along; still mostly impossible for employees in most companies until 6 months after IPO or acquisition)
(c) have realized capital gains in the year(s) following that loss (I don't recall the exact details, but you can net the full loss for 3 years, and then less and less until nothing at all in 7 years or so).
Now, let's look at a more typical case:
You start to work at facebook the day of the IPO; you are awarded 10,000 RSUs at $38 each. That's $380,000 right there; If you make an 83(b) election (to start the capital gains clock ticking), you just scored $380,000 in the "other income" (or even "salary") columns. If you're in high tax place, like NYC, that's 48% in marginal rate (which is not unlikely -- although, assuming you were unemployed, and this all happened on 31-dec, would "only" be 43% or so ....): 35% federal + 8% NY state + 5% NYC. So you just incurred a tax bill of $180,000 of money you never got.
Now, you can get fired the next day. The shares have been forfeited. You do not have a capital loss in that case. Just a $180,000 tax bill with NO income or credit to offset it, regardless of what happens to the stock.
But let's say you stay working for the whole vesting period. Except the whole time you can actually sell them, they are at $16. You're still $20K out of pocket at the end of the period, after selling everything. (And whatever the interest and opportunity costs for spending those $180K on taxes).
But in this case, if you make a huge capital gain profit sometime in the next three years, you'll be able to take credit for your losses - of having bought the RSUs at $38 and sold them at $16 - a loss of $220K.
Oh, and you often have to pay for RSUs, so your losses are larger (although unlike options, that's not mandated by law, and FB could give them to you "for free").
So, no, you don't want to turn the capital gain clock on RSUs unless the shares are essentially worthless at the time of the 83(b) election [or otherwise have no way of siginficantly losing value, and have a good probability of gaining value).
By all means, you should do an 83(b) election when founding the company (if it is needed and makes sense) - on week one, when the value of the company is $5000, it makes sense to pay taxes on your 25%=$1250. But a few months later, when you're raising money at a $1M valuation, that's the value the IRS will want to see on your 83(b) election.
If people do it through an 83(b) election, aren't these RSUs supposed to be taxed as cash at the second of grant? (but if forfeited, that tax is lost?) - That would be horrible.
If people don't do a 83(b), then it is taxed at vesting - so it's just equivalent to a cash bonus at exercise (and taxed the same) - but if that's the case, how has anyone ever thought it was anything other than a cash bonus (determined at bonus time by a constant C*company value for some C, which appears in your employment contract, but is otherwise arbitrary and can be changed arbitrarily at any point before grant by the company)