Tax trap looms for high-tech optionholders

Friday 2nd February 2001

By Nick Stride

Executive optionholders in high-tech companies could end up paying tax on gains they will never see. In the wake of last year's Nasdaq meltdown, former high flyers in the US have been caught in a tax trap, in some cases being assessed for seven-figure sums.

In the US an obscure tax, the alternative minimum tax, applies to gains made on the exercise of options granted as part of an employment package.

Tax is payable on the difference between the exercise price and the market price in the year in which options are exercised.

For many US executives, particularly those in high-tech companies, such options make up a considerable chunk of their salaries.

Those affected exercised options when share prices were at all-time highs before last year's "tech wreck." Many of those shares are now trading at a fraction of the market price at that time or are worthless. But the US Internal Revenue Service still wants its money.

KPMG tax partner Michael Stanley said a similar situation could arise here although our laws differ from the AMT.

Where "benefits" from options schemes exceed $2300, gains on the exercise of options are assessed for income tax at the point at which they're exercised. If a gain was established but the share price subsequently fell below the exercise price and the executive sold, the realised loss would not be deductible against personal income tax but the executive would still be liable for the tax assessed on the paper gain.

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