Tech workers’ company shares slid in 2022 – and so has their wealth. Three steps they can take
Technology workers who are paid equity have seen their wealth decline alongside that of their employers. However, the good news is not as dire as it appears. The Nasdaq Composite has fallen 23% over the past year, and it is well rooted in a bearish market. Tech companies are particularly affected by higher interest rates, which can reduce the future value of their cash flows. The downturn has affected many names: Alphabet and Robinhood are both down around 23% by 2022. Peloton and Robinhood have fallen over 43% and 60%, respectively. Although the financial losses can make it difficult for tech workers to stay focused, there is still some savings potential for those with the right knowledge and the ability to handle the volatility. Megan Gorman from Chequers Financial Management said, “This isn’t a terrible situation if your stock price drops at work.” This must be considered long-term. Equity compensation can come in many forms. After a period of vesting, workers can receive shares in future through restricted stock units. When their shares vest, recipients are taxed. Employers can also issue incentive stock options, which give workers the right to buy a set number of shares at a specified – or strike – price. These ISOs are not subject to tax by employees. They pay capital gains taxes when the stock they have purchased is sold. This means that employees can be entitled to longer-term capital gain tax rates as high as 20% for certain rules. These rules include holding ISO stock at least one year. The alternative minimum tax is another problem that ISOs introduce. The bargain element is the amount that covers the difference between strike price and fair market value. When employees exercise NSOs or non-qualified stock option, they are subject to income taxes. Capital gains tax is also applicable if your shares increase and you decide to sell them. Tech employees should not panic sell their stock holdings. These are some key things to keep in mind as shares fall. You should weigh your risk tolerance and consider the future prospects for your company. Which level of concentration and diversification is most appropriate for your needs? Deane Wealth Management’s founder, Samuel Deane. It is not a good idea to have a large portion of your portfolio made up by one company. The company may then start laying people off due to economic downturn. A strategy that periodically sells some employer shares may work depending on the time and risk tolerance of an investor. Gorman stated that restricted stock units allow employees to sell some shares in order to reduce concentration and gain exposure in a lower-cost, broad fund. Look for tax planning opportunities. Workers who wish to use ISOs at low share prices have a silver lining. Since the gap between strike price and fair value of stock is now smaller, it means that the alternative minimum taxes impact will be lower. What can you do now to secure a lower bargain element and less AMT tax? Albert J. Campo CPA is the president of AJC Accounting Services. Stocks that have lost value can be sold by employees to offset any realized gains. Tax loss harvesting is also known. Consider negotiating. If your share values are depressed, push for refresher grants — more equity — or cash bonuses at work, said Deane. Robinhood, Snap and others offer cash or equity grants to employees who are affected by falling share prices. You should pay close attention to what you do if your goal is to buy more equity. Campo said, “You want to understand where the company’s going.” A conversation with someone from Peloton would differ to one with someone at Snowflake. It all depends on your outlook.