Aliston is referring to a specific circumstance that screwed many employees during the dot-com boom. If you exercise your options, that creates a taxable event for the difference between your option strike price and the fair market value of the stock on date of exercise. If the stock price subsequently goes down a lot, you can end up with a tax bill greater than the market value of the stocks when the lock-up period ends. It was generally advantageous for employees in the rising stock environment of the dot-com bubble to exercise their options before the IPO, or shortly after. For one, it starts the long-term capital gains timer going, so you can sell for LTCG rates 6 months after the lockup ends rather than a year. Two, the difference between your option strike price and exercise price is taxed as income (usually - for NQs and ISOs over the AMT, but not ISOs in low tax brackets), but the difference between exercise price and sale price is taxed as capital gains. That created a situation where many employees had tax bills on stock worth less than the tax bill.
This situation doesn't apply when you have straight RSUs that you sell when the lockup ends. These are withheld at income tax rates when vesting, and then taxed as capital gains rate when you sell. The IPO price doesn't matter in this case.
Pigs get slaughtered. Trying to time your options on a volatile stock to avoid short-term capital gains is gambling. Same-day exercise + sell is what any financial advisor will recommend.
RSU risk is worse because it is outside of your control, unless of course you don't have RSUs. You get taxed on the vest date. Withholding is often at the 25% minimum government rate. Assuming you're in a no-sell window, any downward movement before you can sell increases your effective tax rate, potentially to over 100% in the worst case. Consider the dot-com crash case where your RSUs were worth $1M on the vest date, withholding is $250K, taxes owed are ~$370K, and your regular salary is $100K. If the stock goes to $0 before you can sell... On April 15, the government will demand a check from you for something around $120K, but all you actually took home was around $70K. An effective tax rate of around 170%!
The real issue here might be that you can only deduct $3000 per year in losses. With $1M in losses, you'll be able to carry that over for centuries!
Carried over losses can be applied against future _earnings_ though so if you make $1M and not pay any taxes on it at that point because it's being offset by your past losses. I used it to offset my gains in taxes from selling my company stock (ISOs) when I sold a rental property at a substantial loss shortly after the Great Recession. Had my taxes double checked with an accountant to make sure I did the math right and I was right to the cent.
I thought the saying was “pigs get fat, hogs get slaughtered”?
Also, with $1M in losses, one would not be limited to the $3k offset against ordinary income. Presumably one would have other gains along the way from other investments.
The quote I was paraphrasing was something like, "Bulls make money. Bears make money. Pigs (or maybe hogs?) get slaughtered."
And yes, you are correct on the other point. You would be able to avoid paying tax on your next $1M in lifetime capital gains. *disclaimer: This is not financial advice.
This situation doesn't apply when you have straight RSUs that you sell when the lockup ends. These are withheld at income tax rates when vesting, and then taxed as capital gains rate when you sell. The IPO price doesn't matter in this case.