Senate abandons plan to tax stock options at vesting after backlash from the tech industry

The Senate released a more startup-friendly version of its tax plan Tuesday. (BigStock Photo)

The tech industry is breathing a sigh of relief this morning because the U.S. Senate has ditched its plan to tax stock options and restricted stock units when they vest instead of when they are exercised, as under current law.

Tuesday evening, the Senate Finance Committee released a revised version of its tax overhaul bill that removed the provision, which tech leaders said would have had “a devastating impact on the startup ecosystem.”

The tech industry’s concern had to do with the way startups compensate their employees. Small companies that don’t have the resources to offer salaries competitive with bigger fish often use stock options and related compensation units to attract talent with the promise of a big payout later down the road. The Senate plan would have taxed those units when they became available to an employee but often before they could be exercised. As startup attorney Craig Sherman put it, “you’re taxing people on a theoretical, paper gain that could evaporate the next day.”

The revised plan released Tuesday removes that provision and adds a measure designed to help employees who are compensated in stock options. The language grants a deferral to startup employees who are taxed on their exercised stock options if there isn’t a market to sell them.

“After hearing our concerns, the Senate Finance Committee joined their House Ways and Means Committee colleagues in removing language from their respective bills that would have radically altered the equity-based compensation model that has been so fundamental to the success of the entrepreneurial ecosystem for decades,” Bobby Franklin, CEO of the National Venture Capital Association, said in a statement.