In the wake of a volatile stock market last year, with the Nasdaq index falling more than 50 percent from its peak, many are finding they owe more in taxes than they got from cashing in their options, according to a story in the New York Times this week.
Investors generally incur taxes when they use their options to purchase stock. However, if the stock price falls, the tax liability remains unchanged. As a result, tax experts are estimating that tens of thousands of employees who cashed in their stock options last year are in for a difficult time come April 15, the story reported.
"This problem is far more widespread this year than in previous years," Kaye A. Thomas, an authority on stock options, was quoted in the story. "Many people have fallen the trap where they owe more money in taxes than they got out of their stock options. Some people have been bankrupted by their tax liability."
David Van Wie, co-founder of a San Francisco-based e-commerce company called Intertrust Technologies, cashed out only $3 million of his options, the story reported, but ended up with $8 million tax bill. "I didn't think of it as a crap shoot, but that's exactly what it was," he said.
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ck options, the perk that was a source of instant wealth for many in the 1990s, have become an enormous tax liability for some this year.