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Startup employees should pay attention to Biden’s capital gains tax plans

The Biden Administration has reportedly proposed significant changes to the capital gains tax, aiming to target the wealthiest Americans to help fund his historic aid programs.

If the current proposal goes into effect, it will have an impact on startup employees who aren’t (yet) wealthy. And it’s unlikely the Biden Administration has considered the consequences, because many of these employees aren’t yet in the highest tax bracket. But startup employees need to pay close attention to these changes when planning what to do with their stock options.

We don’t yet know what will end up in a passed bill, which may look very different from the originally proposed plan. This shouldn’t cause alarm for employees or cause them to avoid exercising options, but it is something they should be thinking about when planning their equity strategy.

When it comes to employee equity, the worst decision is always not having a plan of action.

As always, employees should work with their advisers to plan accordingly and get ahead of any changes.

How changes in capital gains tax impact startup stock options

Historically, long-term capital gains, or gains on assets held for over a year, have enjoyed preferential tax rates in comparison to short-term capital gains, which are assets held for less than a year. In Biden’s original proposal, he suggests raising the long-term capital gains rate to the highest ordinary income tax rate on income over $1 million.

If Biden’s changes are enacted, it means that there would no longer be preferential tax rates for those that make over $1 million on the sale of their shares post-IPO or as part of an acquisition. Many employees “go long” with their equity, selling them a year after exercising to benefit from long-term capital gains tax. Under this change, they may be limited to the amount of upside they can convert to preferential capital gains tax depending on their income levels and when they sell.

As with any tax legislation, the devil is in the details, many of which are still to be determined. These are the questions employees should be asking if the legislation moves forward:

  • Is the first $1 million in capital gains still taxed at preferential rates or do I factor in other sources of income to determine the $1 million threshold?
  • How can I plan around the sale of my shares to stay under the $1 million threshold?
  • Is there any impact on qualified small business stock (QSBS)?

Clarity on these questions and details of the plan will provide critical information for employees looking to exercise if Biden’s tax plan advances in Congress.

Capital gains tax rules have always been political

Many presidents have expressed interest in changing the capital gains laws in the past. President Obama, for example, wanted to raise the capital gains tax. President Trump campaigned on capital gains rules, suggesting the carried interest rules, which are possible because of capital gains tax rules, be eliminated.

The questions now are: Will Biden be successful in addressing capital gains tax rules? And will the Democrats risk backlash or potential downsides driven by increased capital gains tax? Many experts suggest that the final legislation, if passed, will result in a capital gains tax increase, but much less than Biden’s original proposal. Some are suggesting Congress will settle on no more than 30% as the highest capital gain rates for those who earn more than $1 million.

Only time will tell, but the suggested tax plan may create a significant, if unintended, burden to startup employees more than anyone else.

Planning around your equity

There’s still a lot of uncertainty around what new tax legislation may look like or if it will happen at all. At this point, startup employees may not necessarily need to act on these potential changes, but they should be taking it into account when planning what to do with their equity and, more specifically, when they are planning to exercise.

Either way, employees should still strongly consider exercising their stock options (it’s a key benefit of working at a startup, after all). Taxes are just one consideration. For example, many companies have exercise deadlines after employees leave a company.

Even if rates to capital gains taxes change, exercising early may still have its benefits, as many employees may still be able to create a plan to sell up to a certain number of shares at preferential rates every year.

While Biden’s proposed plan is focused on changing the federal tax rates, state income tax considerations remain. Startup employees have been moving away from high-tax states such as California and New York in favor of no-income tax states such as Texas and Florida. Those that are planning a move may have a big incentive to exercise their options to limit California and New York’s reach on the shares.

It’s important that employees understand the advantages and disadvantages of exercising today versus waiting until after an IPO. When it comes to employee equity, the worst decision is always not having a plan of action.

80% of the 22 million comments on net neutrality rollback were fake, investigation finds

Of the 22 million comments submitted to the FCC regarding 2017’s controversial rollback of net neutrality, some 18 million were fake, an investigation by the New York Attorney General’s office has found. The broadband industry funded the fraudulent creation of about 8.5 million of those, while a 19-year-old college student submitted 7.7 million, and the remainder came from unknown but spurious sources.

The damning report, issued today, is the result of years of work; it set up a tip line early on so people could report fraudulent comments, and no doubt received plenty, as people were already independently finding themselves, dead relatives, and other obviously fake submissions among the record.

It turns out that a huge number of these comments were paid for by a consortium of broadband companies called Broadband for America, which laid out about $4.2 million for the purpose. They contracted with several “lead generator” companies, the kind of shady operations that offer you free trials of “male enhancement pills” or the like if you fill out a form — in this case, asking the person to write an anti-net-neutrality comment.

As if that wasn’t bad enough, the lead generation companies didn’t even bother plying their shady trade in what passes for an honest way; instead they fabricated the lists and comments with years-old data and in one case with identities stolen in a major data breach. The practice was near universal:

In all, six lead generators funded by the broadband industry engaged in fraud. As a result, nearly every comment and message the broadband industry submitted to the FCC and Congress was fake, signed using the names and addresses of millions of individuals without their knowledge or consent.

The broadband companies are off the hook on a technicality, since they were careful to firewall themselves from the practices of those they were contracting with, even though the record shows it was plain that the information being collected and used was fraudulent. But because the actions were, ostensibly, independently taken by the enterprising lead generators, the buck stops there.

Notably, these scams were also involved in more than a hundred other advocacy campaigns, including submitting over a million fake comments for an EPA proceeding and millions of other letters and digital comments.

The wholesale undermining of the processes of government earned fines of $3.7M, $550K, and $150K for Fluent Inc, React2Media, and Opt-Intelligence respectively. There are also “comprehensive reforms” imposed on them, though it may be best not to expect much from those.

Internet rights advocacy organization Fight for the Future issued a king-size “I told you so” noting that they had flagged this process at the time and helped bring it to the attention of both government officials and ordinary folks.

Another 7.7 million fake comments were submitted by a single person, a California college student who simply combined a fake name generation site with disposable email service to provide plausible identities. The person automated an individual comment submission process, and somehow the FCC’s systems didn’t flag it. Another unknown person used similar means to submit another 1.6 million fake comments.

Acting FCC Chairwoman Jessica Rosenworcel said in a statement that “Today’s report demonstrates how the record informing the FCC’s net neutrality repeal was flooded with fraud. This was troubling at the time because even then the widespread problems with the record were apparent. We have to learn from these lessons and improve because the public deserves an open and fair opportunity to tell Washington what they think about the policies that affect their lives.”

Indeed at the time Rosenworcel suggested delaying the vote, joining many in the country who felt the scale of the shenanigans warranted further investigation — but then-Chairman Ajit Pai brushed aside their concerns, one of many decisions that have considerably tarnished his legacy.

Altogether it’s a pretty sad situation, and the broadband companies and their lobbyists get off without so much as a slap on the wrist. The NY AG report has a variety of recommendations, some of which no doubt have already been implemented or suggested as the FCC’s comment debacle became clear, but the bad guys definitely won this time.

China expresses concern over its absence in India’s 5G trials

China expressed concern on Wednesday over India’s move to not grant any Chinese firm permission to participate in 5G trials in the world’s second largest internet market as the two neighboring nations struggle to navigate business ties amid their geo-political tensions.

India’s Department of Telecommunications earlier this week approved over a dozen firm’s applications to conduct a six-month trial to test the use and application of 5G technology in the country.

Among those who have received the approval include international giants such as Ericsson, Nokia, and Samsung that will collaborate with Indian telecom operators Jio Platforms, Airtel, Vodafone Idea, and MTNL for the trial.

Huawei, ZTE and other Chinese companies, that have been operating in India for several years, haven’t received the approval from the Indian government to participate in the upcoming trial. The Indian ministry said earlier this week that it granted permission to those firms that had been picked by the telecom operators.

Wang Xiaojian, the spokesperson of Chinese Embassy in India, said in a statement on Wednesday that the nation expresses “concern and regret that Chinese telecommunications companies have not been permitted to conduct 5G trials with Indian Telecom Service Providers in India.”

“Relevant Chinese companies have been operating in India for years, providing mass job opportunities and making contribution to India’s infrastructure construction in telecommunications. To exclude Chinese telecommunications companies from the trials will not only harm their legitimate rights and interests, but also hinder the improvement of the Indian business environment, which is not conducive to the innovation and development of related Indian industries,” added Xiaojian.

Last year, Airtel (India’s second-largest telecom operator) had said that it was open to collaborating with global technology firms, including those from China, for components. “Huawei, over the last 10 or 12 years, has become extremely good with their products to a point where I can safely today say their products at least in 3G, 4G that we have experienced is significantly superior to Ericsson and Nokia without a doubt. And I use all three of them,” Sunil Mittal, the founder of Airtel, said at a conference last year.

In the same panel, then U.S. commerce secretary Wilbur Ross had urged India and other allies of the U.S. to avoid Huawei.

The geo-political tension between India and China escalated last year with skirmishes at the shared border. India, which early last year amended a rule to make it difficult for Chinese firms to invest in Indian companies, has since banned over 200 apps including TikTok, UC Browser and PUBG Mobile that have ties with China over national security concerns.

India’s move earlier this week follows similar decisions taken by the U.S., U.K. and Australia, all of which have expressed concerns about Huawei and ZTE and their ties with the Chinese government.

“The Chinese side hopes that India could do more to enhance mutual trust and cooperation between the two countries, and provide an open, fair, just, and non-discriminatory investment and business environment for market entities from all countries, including China, to operate and invest in India,” wrote Xiaojian.

Last year, China had expressed “serious concerns” and “firmly opposed” India’s charges that Chinese apps posed national security concerns. The Chinese Embassy had alleged that by banning apps with links to China, New Delhi was engaging in “discriminatory practices” that “violated WTO rules.”