Managing your equity compensation, with Alex Crouch

Managing your equity compensation, with Alex Crouch


Steve still hasn't heard back from the IRS

[00:00:00] Steve: So Tyler, you remember a few months ago when I got a letter from the IRS

[00:00:04] Tyler: Yeah.

[00:00:05] Steve: and it was about, um, that, uh, the, the IRS found a 1099B from a broker and the stocks listed on that were not shown on my tax return. And I had to go back and say, uh, here's, here's what they were. Uh, and, and this is why the, this is what the basis should be.

Do you remember

[00:00:27] Tyler: Yeah. And I remember you were feeling pretty confident about your argument. How, how's that going?

[00:00:31] Steve: Right. Uh, well, I, I haven't heard back yet, uh, aside from the acknowledgement letter of, Hey, we have your stuff, but we, it's going to take us another month or two or three to get back to you. So I don't know, it's not resolved yet, but the reason I bring it up now is, uh, the The problem there was, uh, equity compensation from my previous job, uh, stock that I got as part of my compensation package.

The, the way the brokers do that, they don't report the cost [00:01:00] basis on the 1099B for whatever reason. And so that makes it confusing when you go to file your tax return. And this is one of the things we're going to talk about today with Alex Crouch.

And obviously before we dive in, this is always true of this podcast, but, uh, none of, none of what we're talking about today is specific tax or investment advice for you. Consult your own professionals, uh, for that, where this is general and educational in nature. Uh, but it should be good.

Hello there, dear listener. I am Steve.

[00:01:36] Tyler: And I'm Tyler and welcome to another episode of It's Not About The Money, the podcast where we help you gain the clarity you need to run a successful small business.

[00:01:45] Steve: Tyler has a financial coaching practice. I run a tax business and we're both small business owners like you. And this podcast is our exploration of entrepreneurship one episode at a time.

RSUs, stock options, and ESPPs

[00:01:57] Tyler: And today we're going to continue our series [00:02:00] about the many hats of an entrepreneur, where we cover business functions that every business has. But where you as the owner may not be expert, like things like marketing, IT, sales, and finance. And today we're going to talk about how you fund your business.

Now, if you're like Steve and me, you have a day to day job that pays the bills while you build your business. You might even have a job that includes some sort of equity compensation, which is a really common scenario in tech companies, but equity compensation can be complicated. And full of potential pitfalls.

So today we're excited to introduce to you Alex Crouch to demystify this topic.

[00:02:39] Steve: Welcome Alex. Alex Crouch is a certified financial planner and the founder of Tech Financial Planning, where he specializes in holistic financial planning for tech professionals with equity compensation. And that equity compensation is a big part of what we're going to talk about today.

He helps people in tech reduce their taxes, optimize investments, [00:03:00] improve their cashflow, protect their assets, grow their wealth, and live a life that they love. Welcome, Alex.

[00:03:06] Alex: Thanks for having me y'all. I'm excited to be here.

[00:03:08] Steve: So one, I, I met you, I don't know, last year sometime, uh, and, uh, through LinkedIn, because you have a lot of great content there about equity compensation specifically. And so I wanted to have you give us, uh, to start with here, uh, kind of an overview of all the different types of equity compensation that tech employees might receive.

And then we can go into some details about like, what's different about each of those things

[00:03:33] Alex: Yeah, absolutely. So I I'd say that the most common type that most people are probably familiar with is RSUs, so restricted stock units. That's really common at public tech companies . So all of your, you know, your Google, Amazon meta, but, but also even further down the list, it's just, it's a, it's a very common form of stock [00:04:00] compensation.

You also have your stock options, which are a lot more common at startups smaller businesses, although I have seen it at, at larger companies as well. It's not it, it can be at both. The other one I think that is probably the most common form of stock compensation is just your. Employee Stock Purchase Plan, which gives you the right to purchase stock at your company at a discount.

There are some other weird ones, but I feel like for the sake of this conversation, we probably shouldn't dive into like stock appreciation rights and, and strange things like that, that, that don't come around that often.

[00:04:37] Steve: Okay, but good to know that they exist and, and you understand them.

[00:04:42] Alex: Yeah. It's a, it's a, it's a deep, dark world out there.

[00:04:47] Tyler: Yeah. I'd never actually heard of, heard that term stock appreciation rights. That's interesting.

[00:04:51] Steve: Yeah, I've heard of these other three though, so that, I think that's a great place to start. So what are like the, the pros and cons of each? Well, I mean, I [00:05:00] pros and cons as if you have a choice, I suppose, but. Maybe you do sometimes.

[00:05:04] Alex: Sometimes you do. I, so yeah, like Spotify, for instance, gives you the option to choose between them Netflix does, there are some company, it's, it's, it's not that common most places you get what you get and it's that, that's that, but you do occasionally have the option.

[00:05:21] Steve: Uh, like I was, I was talking to someone recently at a big tech company you would have heard of that, uh, they're rolling out something, uh, where you can take a certain percentage of your RSUs as cash based on the current price, but it'll still vest at the, you still get the cash at the same time the RSUs would have vested, uh, as, as I guess, a hedge against if you think the stock price is going to change.

Down, then you could elect that now so that over the next two years, while you get that cash, you, I don't know. I said, that was an interesting, interesting one. I'd never heard of before.

[00:05:56] Alex: I've worked through that, that same sort of, um, decision where essentially [00:06:00] somebody had, it was like their bonus. So it was, it was like their long term incentive bonus, which really, All of these forms of compensation are intended to be like long term incentives. They're intended to help you stick around with the company, especially because they're on a vesting schedule.

So you don't get, you don't typically get them all at once. You're incentivized to stick around with the company by, by staying there. So you always have a little bit more, a little bit more as you continue to stay with the company. So in this situation, uh, the, the person had the option to choose between RSUs, stock options, and cash in, in the same way that you were talking about, where they had the choice to choose how much they wanted split between those.

Um, and when you were talking about like the pros and cons of each, and I think it can be helpful to think through just in terms of like, So maybe I can't choose specifically at my company, but sometimes you have the option to choose between like different offers or choosing a different route that you want to take in your career per [00:07:00] se.

And so with restricted stock units, RSUs, I think the pros of those is that if you're at a public company, at least there's always a value to them. Like it's never worth zero unless the company, I guess, goes out of business, but then you've got bigger problems on your hands. Um, so it's always worth something.

Whereas with stock options, which is usually the other route that you can take if you go to a startup or a smaller business with stock options, you have to have growth in the stock price or else there is no value to it. And the reason that's the case is I like to think of stock options as kind of like a coupon that you get.

So like if you have a, if your company gives you a coupon where you can buy your stock at, let's say 2 per share, like if they give it to you, the stock is at 2 per share, that coupon only has value if the stock increases to three or 4 per share, because you've locked in your purchase price. [00:08:00] But if it sort of flounders at that 2 or if it goes down in price, then you're obviously not going to use that coupon.

It doesn't really have any value. On the flip side, those stock options do typically have more upside, more growth potential because there is leverage in stock options, whereas with RSUs, you don't have that. So I, I sort of think of it in terms of like, RSUs are the safer, more stable option, whereas stock options have more upside growth, but also have more downside to them.

[00:08:32] Steve: Okay. So RSUs are sort of a, a cash equivalent that might have upside value. It could go down too, obviously, but not, probably not to zero where a, a stock option is. When, when you say leverage in that case, what do you mean?

[00:08:48] Alex: So when you, it's, it's sort of one of the things you have to dive into the math to understand it, but essentially. The closer it is to the strike price with your stock [00:09:00] option, the more it can go up. So I'll just put it this way. If you have like a 1 increase in your, in the stock price with a, with an RSU, that would be, okay, let me, I'll back up one more step.

If the stock price is at 99 and you have an RSU, if it goes up 1 to 100 per share, that is like a 1 percent gain for your RSU. But if you have stock options and you have, let's say like a thousand stock options and they've been granted at you at 99 per share, if it increases to 100 per share, that's actually a really big Bump for you.

That's well over 1%, um, if you've got a thousand of them, right? So you actually have the ability to grow your equity by more than the stock price goes up itself.

[00:09:57] Tyler: Interesting. I've got kind of a [00:10:00] basic question. Sorry to go back just a little bit, but stock options, is that option referring to the option to buy or like. What they call exercise as opposed to an RSU where you're just kind of given it.

[00:10:10] Alex: Yes. Great question. So yeah, it is, it is the option to buy and that, and stock options are. A little bit more complicated in that sense where with RSUs, it's just given to you. You don't do anything. You just wait. And then once you've met the requirement, which is usually just a time requirement, then it vests you.

You get it. But with stock options, you have the option to buy the stock. Or you have to make an active decision to purchase the stock.

[00:10:38] Tyler: Put in some of your own money, basically.

[00:10:39] Alex: Exactly.

[00:10:42] Steve: Okay. And, and then a, an employee stock purchase plan sounds similar to a stock option in that sense, but it's, it tends to be maybe a public company where the, the stock is out on the market, but they're letting you purchase it at a discount. Is that right?

[00:10:58] Alex: Exactly . So, [00:11:00] and, and I've seen this happen lots of different ways. So the, the amount that you get discounted can be different. Um, yeah, so typically the way that it is, it's, it's actually like a, um, a paycheck reduction. So in the same way that you, reduce your paycheck for your 401k and it goes, it goes into your 401k, it's the same thing where you'll reduce your paycheck by whatever percentage you've selected.

And you'll use that much to purchase your company stock at a discount. Sometimes they'll have features like a look back feature, which makes it even more, beneficial. But yeah, it's, it always happens at a, at a public company. And, it's really, it's a great benefit. There there's limits, there's the IRS limit of 25, 000 on it.

So it can only go so high, but. I view it as essentially kind of free money if you're, if you're buying and selling it immediately,

[00:11:54] Steve: That makes sense. Cause you got it at a discount, but you could turn around and sell it, uh, immediately or [00:12:00] if there's a holding period, I suppose, but after that. point, then, uh, then you've got that profit locked in.

[00:12:06] Alex: right?

Tax implications of RSUs

[00:12:07] Steve: okay. So I'm, I'm a tax guy and I would love to hear about the tax implications of, of each of these things.

Um, RSUs, I, I understand pretty well, but well, let me, I won't say that because the listener may not.

[00:12:23] Tyler: Well, teach me. Cause I don't have any, unfortunately,

[00:12:25] Steve: so could we go through, uh, each of these, uh, these three types and talk about how, uh, how do you get taxed, um, when you. Receive the option or the RSU or whatever, when it vests, and then when you potentially down the road sell it or, or other points along the way if there are other things that I haven't thought of.

[00:12:46] Alex: Definitely.

[00:12:47] Steve: Or actually, before we get into that, I want to step back for a second and, uh, say for our listeners specifically, where you might have a day job and you're wanting to start a side business, what's [00:13:00] really the value of having equity compensation on top of a salary, where maybe you could use that as, as the seed money to start the business or that kind of thing?

[00:13:10] Alex: I was thinking two things on that front. A, the tax side of things is important to understand because it's important to understand how much you have. at the end of the day, ultimately the only dollar amount that is important is the net after tax amount that you have to go do whatever you want with.

So if that is to use to go, you know, as seed money to start a business, or whatever, that is ultimately what matters. And then also kind of like we were discussing before with how much do you have and how much do you, can you plan on having that? Those are all really important numbers to understand, when you are going to, to do something like fund a business.

I mean, you, you certainly need a lot more cash runway with certain kinds of businesses. Than [00:14:00] others. And so, you know, maybe setting aside some of that, a certain percentage of the, the RSUs that you have vesting or whatever it is. So that you can use that money for, for your goals.

[00:14:11] Steve: Okay. Yeah. That makes sense. that's good context for, for, uh, before we dive into the weeds here.

[00:14:17] Alex: So I guess I'll, I'll just start with RSUs. Um, so when they are granted to you, there is no, there's no tax implication. You get them , nothing really happens until they've vested. Which is when I think of vesting as like, this is when they're actually mine. They're not, it's just kind of like an IOU up until that point.

But once they've vested in, they're actually mine. So grant date, nothing happens. With RSUs though, once they vest, they're immediately taxable as ordinary income. And actually, I guess I should back up and say, I'm viewing this through the lens primarily of, at public companies, because that's usually who I'm, um, [00:15:00] working with . If you have public stock, when it vests, it's immediately taxable as ordinary income. That's actually a really common misconception that people have. Because with RSUs, oftentimes they think that if they hold the stock for one year after it vests, that they can qualify for long term capital gains.

And that's kind of true, but not exactly because no matter what, you can't do anything to change the fact that when it vests, it's immediately taxable as ordinary income.

[00:15:29] Steve: Mm-Hmm, And that will show up on your W2.

[00:15:31] Alex: exactly.

[00:15:33] Steve: Okay.

[00:15:33] Alex: Um, I, I, made the caveat with a private company though, because there are, if you are at a private company, um, you can have double trigger RSUs where nothing really happens. It doesn't become taxable until you've had, uh, like a second event, like a liquidity event. And that just prevents people from getting in a tax bind when they can't actually turn around and sell these

[00:15:55] Steve: oh, okay. That would be like the, the private company finally goes public or, or the [00:16:00] employees have an opportunity to sell

[00:16:01] Alex: RSUs.

[00:16:02] Steve: and that's when it becomes taxable income.

[00:16:04] Alex: Exactly.

[00:16:05] Steve: Okay. And then if you. Say six months later after the VEST date you sell it or a year later you sell it. Can you talk about the difference there?

[00:16:16] Alex: Yeah. So if you sell it any point before a year, so six months later in your, in your example, you would be, so you've already been taxed on ordinary income at the, on the VEST state from the VEST state to the point at which you sell it. That whole time period is going to be taxed as capital gains tax. If it's under a year, that'll be taxed as short term capital gains, which is, as you know, that's, the same as your ordinary income rate. But if you hold it for one year or more, that's when they long, that's when you get into long term capital gains, which is a preferable, tax treatment. Um, but once again, I just feel the need to go back and say this, because [00:17:00] this is a common misconception. Again, if you hold it for that one year, you're qualifying the growth portion. So let's say it vests at like 50 and then you end up selling it at 70. Only that 20 of growth would be eligible for the long term capital gains if you hold it for more than a year.

The 50 has already been taxed as ordinary income on vesting.

[00:17:22] Tyler: So where do people get the money to pay that tax? Does it come out of RSUs somehow or do they need to owe taxes on it at tax time?

[00:17:32] Alex: So when they vest, typically your company will give you the option to, to do it a couple of different ways. Oftentimes you'll, they'll just withhold a number of shares and just give you the remaining amount. So they've kind of held back the number of shares. Um, sometimes that's not enough though, because the, the typical, the default tax withholding rate is 22 percent on RSUs.

For high earners though, sometimes you can be in a, you know, 35 percent tax bracket. You can be much [00:18:00] higher than that. So it is worth making sure that the amount withheld is enough for your particular situation. You can though, choose to hold, you can choose to keep all of them and then just pay the cash out of your own pocket.

Most people I find don't. Don't choose to go that route though.

[00:18:18] Tyler: Understandable.

[00:18:19] Alex: I wouldn't.

Taxes on stock options

[00:18:20] Steve: Okay, great. So that, I think that covers RSUs. Uh, how about options? What, what are the tax implications of, of the lifecycle of an option?

[00:18:31] Alex: Yeah. So the stock options I'd say are significantly more complicated on the tax side of things. Um,

[00:18:39] Steve: Okay, so if you want to, if you want to elide any details or just say, like, it's complicated, we can totally do that too.

[00:18:46] Alex: yeah, so the biggest thing I would say is you need to understand what kind of option you have, because there are two main types. There are incentive stock options and there are non qualified stock options. So I'll just like briefly go [00:19:00] over the, the high level. And then I'd say outside of that, you probably need to, to, to talk to somebody who knows what they're talking about,

[00:19:07] Steve: Mm hmm.

[00:19:08] Alex: but with non qualified stock options.

When you exercise them, that amount between your strike price and the fair market value of, of the option at the time is counted as ordinary income.

[00:19:24] Steve: Okay.

[00:19:25] Alex: Um, then you have after that, cause remember all that's doing is that's just buying the stock. Then after that, you have the choice to whether or not you want to hold it or, or sell it.

[00:19:34] Steve: At that point, it has the same treatment as, as we talked about before, of if you hold it for a short term versus a long term, uh, you'll get the different tax rates.

[00:19:43] Alex: Exactly.

[00:19:44] Steve: Okay.

[00:19:46] Alex: With incentive stock options though, that's when you get into the world of alternative minimum tax, which is, wildly complicated. So there is a chance when you exercise your incentive stock options that it may not be [00:20:00] taxable at all, but you could have to pay alternative minimum tax, and that's something that you really need to, to sort of run the numbers on to see where you land.

[00:20:10] Steve: Okay. I think that's sufficient detail for, for this conversation then. Talk to your, talk to your advisor beyond this, like obviously none of this is, is tax or investment advice, but specifically on complicated questions like this, you, you really do need a professional who knows how to run these numbers.

Taxes on Employee Stock Purchase Plans

[00:20:29] Steve: Okay. Employee stock purchase plans. Is there anything, uh, unique about those tax wise? Maybe

[00:20:36] Alex: So those are. Interesting in the fact that they have, you can also qualify for a preferential tax treatment with ESPPs in that if you hold the stock, if you don't sell it for two years after the offering start date, and then also hold it for one year after you [00:21:00] purchased it. Then you can qualify for a preferential tax treatment.

The specifics on that can also get a little bit complicated , but you can, if you hold it for long enough, if you meet those two requirements, you can get preferential tax for treatment as well. One of the things that I talk with clients about with that choice though, is like, is continuing to hold it. Is that worth the increased risk of having, you know, building up more and more stock in your, your company?

How does this money fit into your life?

[00:21:33] Steve: this is a good time to switch to that topic of like, what, what questions do you ask clients when you're helping them decide how to handle equity compensation? And I think risk concentration or like diversification is a, is a big piece of that, right?

[00:21:46] Alex: Yeah. So I actually really like the, um, the title of this podcast. It's Not About The Money because I think that particularly for this, topic, I think that sometimes you can get bogged down too much. And [00:22:00] like, well, how do I optimize for taxes? Or, you know, how do I optimize for my money? And the first thing before I dive into any of that is to step back with people and, and think about like, okay, how does this fit into your life?

Let's, let's take a step back and, and think about what are your goals? What are you hoping to accomplish with your life? Are you trying to buy a house in the next couple of years, are you, is this just money that's long term for retirement? Are you trying to use it to put your kids through college? Are you cashflow negative right now?

Like you, you really need to get clear on all of those things before you make a decision on how to handle this . And so that is the first question that I'm trying to get clear with on people is like, what are we doing with this money and that should dictate how we approach the money. Um, so for instance, if you do like, if you, if you don't have a lot of money in the bank, And you have this equity compensation, um, let's say you've got some RSUs and you really need it to be able to fund some [00:23:00] short term goals, then it probably doesn't make sense to continue to hold it because you could use that to fund your life currently that you need.

Um, where instead of thinking of it in terms of like, okay, well, I'm at Amazon. Is Amazon stock price going to go up? Well, maybe, maybe we're jumping ahead of ourselves because maybe that's not the question to ask. Maybe the question to ask is. How does this fit into my life first and then dive into the taxes and the investment decisions afterwards?

[00:23:33] Tyler: You know, I think that's actually a really cool approach. That's something I've learned is in my last year and a half working as a personal finance coach is sometimes the right decision to make with money is not the optimized, you know, mathematically optimized choice. It's what's going to make you achieve your most important goal right now faster. So that's, that's cool. Cause I tend to get kind of, particular, neurotic, perhaps [00:24:00] about optimizing, you know, I don't want to pay a tax, I don't have to pay. And, you know, I want to sell at the right time, but I mean, honestly.

You can't predict any of that anyway. So it's better to just kind of take, take stock of what you're trying to accomplish in your life right now. What's your current highest priority and then make decisions accordingly.

[00:24:18] Alex: A hundred percent. And I think that also, if you, if you don't take that approach, it actually makes your decision making framework a lot easier because otherwise I find people they'll like anchor around Certain things. So they'll, they'll, they'll think to themselves, like, I got this stock at a hundred dollars per share and it goes down a little bit and it's like, well, I don't want to sell it until it goes back up above a hundred dollars.

So there you're anchoring around all these other things that you don't have control over,

[00:24:45] Tyler: Right.

[00:24:46] Alex: um, or, or waiting until you hit that one year mark to sell it. And it just, it, it muddies the waters and it makes it hard to, especially if you. Deal with like analysis paralysis. It makes it hard to actually make a [00:25:00] decision.

And it's better to just take, you know, take a step back. Think, think about how it fits into your life and work from it from there.

[00:25:06] Tyler: Right. Cause there's a possibility that whether the price, even if the price went down a little bit, you could still achieve your goal. Now or sooner,

[00:25:13] Alex: Exactly. Like start your own business.

[00:25:15] Tyler: Yeah. Yeah.

[00:25:18] Steve: Yeah. And that's something I like about both you and Alex having, uh, An outside advisor that can coach you through those kinds of questions where I might be, you know, stuck in the weeds of, uh, what are the numbers of these investments going to do? But being able to take a step back with somebody like you, uh, seems really valuable when you have these complicated questions,

[00:25:41] Alex: Yeah. So definitely . So, you know, starting with your, with your personal situation first, but the other thing that I always want to make sure that we're doing is just taking, uh, stock. No pun intended of where, how this fits in to your overall [00:26:00] financial picture. So always, what I want to do is look at the numbers of like, what percent of your total portfolio is this?

I find that sometimes that's, that's something that people don't have any idea of, of how it fits in. But if you actually sit it all down, it's like, okay, what are all of your investments, if we're looking at your 401ks, your IRAs, your, taxable accounts. If we look, if we're looking at all of it, does that make up 5%?

Does that make up 10%, 50%, 75%? Sometimes if people are continuing to hold their stock, that gets to be a really big portion of their, overall investment portfolio, especially if then we also consider what is unvested. And the question I always ask people is, how much are you comfortable with this representing of your overall investment portfolio?

I like to keep that number at, or I like to keep any individual stock at around like five to 10%. no more than that, [00:27:00] but ultimately it's, it's your decision. As long as you're, as you understand the risks and the risk is obviously that the more you have your eggs in one basket, the more you are reliant on that company.

And especially when you're working at that company and they're also cutting your paycheck, that's a real risk. If you get laid off. I mean, especially in tech, we see that oftentimes you have rounds of layoffs coming and, um. Layoffs happen typically when companies aren't doing that well. So oftentimes what you'll see is your stock price has maybe been cut in half.

And that's when you find out you're getting laid off.

[00:27:34] Steve: Ah, so not only is your risk. Concentrative, it's also correlated on both of those factors, the salary and the stock units.

[00:27:41] Alex: exactly.

[00:27:45] Tyler: And speaking from personal experience, what really stinks is getting laid off just before vesting.

[00:27:51] Steve: Oh,

[00:27:52] Tyler: Sadness.

[00:27:53] Steve: Does that happen to you? All

Alex's approach to financial planning

[00:27:57] Tyler: so we've alluded, [00:28:00] Alex, to your clients a couple of times. I'm actually really curious, you know, what does your company do? I'd love to hear about the services that you offer. Like, who is your typical client? Sounds like you might work a lot with tech workers, for example, uh, people who get this kind of compensation.

Um, and like, when would someone in this situation want to consider hiring someone like you?

[00:28:20] Alex: Yeah. So the name of my firm that I founded is Tech Financial Planning. So that's, that's a pretty self explanatory. I work with people in tech. Um, And usually people who have this type of compensation, so they get paid at least in part in stock. and the, the way that I work with people, oftentimes, you know, people might think in their minds that a financial advisor, they, they just do investments.

That's not the approach I take at all. I want to look at basically everything in your life that has a dollar amount attached to it. So getting, starting first, like I was talking about before with like getting really clear on what your money is for, using that as the starting point [00:29:00] before we decide anything else.

but then once we do have that clear, then, you know, handling everything from investments, taxes, insurance, estate planning, cashflow planning, like, you know, budgeting, if that's important to you, employee benefits, which is a big thing at, tech companies and college planning. So sort of running the gamut of everything that is included in somebody's financial life.

[00:29:25] Tyler: That's cool. So I have to ask, since you work with a lot of people, in these types of situations, do you find that there are any patterns in like struggles that, that people have either in just like thinking about this holistic approach or like, I mean, you've already mentioned, for example, kind of a, um, An over focus perhaps on the stock price or the, you know, is there anything else that, that you find is, yeah, to be kind of common issues that you can help people work through in thinking about these things?


[00:29:52] Alex: You definitely see the same sorts of issues come up and oftentimes sometimes people are aware of those issues, but sometimes it's something where [00:30:00] it's a, it's a blind spot. Um, I think that the, the, the types of things that you run across is people just, Not really taking action. And so maybe they know, so particularly with, with, um, talking about like RSUs or with, with stock compensation, they've, they've just been given this stuff and they, they know that it's, that it's there , but they haven't really made a conscious decision about what to do with it.

So they've just sort of let it sit there. And so they don't have a plan about how to use it or what to do with it. But of course the same thing could be true for other areas of your life where you have a lot of cash that's building up in the bank account. You're not exactly sure what you should be doing with it.

I know a lot of times people come to me and they're like, I know I should be investing. I'm not sure what to invest in though. And I want to do this the right way. so I just need some help or some guidance on how exactly to go about all of this. So the, I think that there is that level of like inaction that people are aware of, that [00:31:00] they know that they should be doing something about, um, On the flip side, though, oftentimes you've had people who've done too much, who have gone through experiences where they, you know, they, they gambled, they took some risks that didn't pay off in the past, or they, they've just come to the realization that the way that they were doing things previously hasn't worked out the way that they've wanted it to.

And so they want to, to partner with somebody who, who has more experience in, in, in how to grow their wealth and, and attack all of these strategies.

[00:31:33] Tyler: that makes sense. And the commonality between those two is basically people who are ready for a change, it sounds like, whether it's taking more action or dialing it back a little bit, being a little more conservative.

[00:31:42] Alex: Definitely. Yeah, a hundred percent. And, and I think the other thing too, is also, People, there are some people, I mean, like, like myself and I'm, I'm assuming probably for each of you as well, where you enjoy actually like diving into this stuff, but there's a lot of people who just want to outsource this stuff.

They're like, I don't want to [00:32:00] spend all my time, my weekends, you know, diving into finances. I want to go hang out with people. I want to spend time with my family. I want to do like live my life. And there, so there's definitely that, that other, uh, aspect of like, I want somebody to, to do this the right way.

And I want somebody to help take some of this stuff off of my plate. Knowing that everything is handled the right way.

[00:32:19] Tyler: hard to imagine that those people are out there, but it is true.

[00:32:25] Alex: I think there's probably more of them than there are of us.

[00:32:28] Tyler: definitely.


[00:32:29] Steve: And this whole interview series that we're doing so far has really been focused around, uh, like what is an area of your business or your life that, that maybe would be better for you to outsource, uh, either by learning more about it yourself or just saying, I, I don't have the time or interest to learn this thing, but I want to hire somebody who's really good at doing that piece of it.

And I will let them be excellent at it. So I'm glad you brought that up.

[00:32:54] Alex: Yeah, absolutely. I've definitely, I've realized that with my own business, that there are things that while I could do them [00:33:00] myself, I, somebody else could do it for me. They could do it better. They could do it faster and potentially my time is better off spent making more money doing the things that I'm, uh, you know, best at.

[00:33:13] Steve: Right. Yeah. Yeah.

1099-B basis on your taxes

[00:33:16] Tyler: Well, that's great. I'm curious if there's anything that we haven't talked about yet that you were hoping that we would, or questions that you You know, I'd like to cover that we haven't talked about yet.

[00:33:27] Alex: Oh, I wanted to get back to the, the 1099, uh, B thing that you were talking about. Cause I wanted to find out. So one of the things that I see, especially coming around tax time that I see a lot of is mistakes that happen on tax returns with stock Compensation, the big one being that the cost basis is, is, is either not reported or it's reported incorrectly. And that essentially leads to you being double taxed. Um, that's oftentimes I mean, I saw I've seen it cost somebody [00:34:00] 25, 000 where if they hadn't caught it. They would have been out that. So, Hey, I'm curious what happened with your situation.

[00:34:07] Steve: Mm hmm. Uh, that's exactly what happened there is that the, the 1099b said that the cost basis was zero. I knew that was incorrect. Um, and, uh, I, at the time had neglected to put that on the return because I thought this, this came out to zero, so it doesn't need to go on there, I guess, or I missed it. I don't know.

I self prepared that return, so I will own that mistake. But, but then the IRS said, Hey, we've, we found this 1099B. It shows that you had a whole lot of, a whole lot of income here with a basis of zero and, and, uh, proceeds of tens of thousands. So you owe us 1099B. Uh, you owe us five figures of tax now to, to cover this, to tell us why we're wrong, or, uh, if you don't do anything, uh, we'll assume that you agree with us and we'll send you the bill.

[00:34:55] Alex: So you're in the process of telling the IRS why they're wrong.

[00:34:59] Steve: Yeah. And I had all [00:35:00] the documentation too for it. And this is, we mentioned this in that episode where we talked about this, but, uh, keep all your documentation because it was really useful. Now, to be able to say, here's the broker statements, here's the pay stubs, here's where all the numbers match up, this is the explanation of what happened.

Uh, you know, I, I think it's a pretty cohesive story.

[00:35:21] Alex: And it's definitely not obvious when you get those tax documents that, that there is, you, I think in most situations, when you receive tax documents, when you, you know, you get stuff from your custodian, your, your 1099s, all that stuff, you assume that this stuff is all right. So you just pass it along or you just go and you file it.

That's one of those times when that you can actually go work against you, where you just assume this is all right, but it's actually, you know, biting you in the butt.

[00:35:51] Steve: This is a huge problem with cryptocurrency. Uh, I don't have very many clients yet that, that do crypto because it's just so complicated and the, the documents you get from the [00:36:00] broker are usually wrong because they're, the assets have moved around between different wallets or they don't have the cost basis.

And so it's really hard to tell, but I was just advising a client this morning, um, on this issue of, of the cost basis. Like make sure when you get this into, Your tax software that, uh, that that cost basis is right. Cause you don't want to get double taxed on this.

[00:36:23] Alex: Yeah. It's, it's actually a really big problem. I, I I'm surprised that it hasn't been solved yet because. I would be willing to bet there are a lot of people out there who are overpaying on their taxes without realizing it because they, they don't know this is an issue.

[00:36:38] Steve: Mm hmm.

Don't pre-spend your equity

[00:36:40] Alex: So the second thing is just that, um, I think that the other way to approach when you're talking about, uh, stock compensation, because at the end of the day, you don't know how much This is going to be worth, sometimes it can be a little bit hard to plan around. It's obviously, you know, when you have a salary, you know, you're making [00:37:00] a hundred thousand dollars.

It's really easy to plan your life around that. The thing that I think is helpful for discussing with clients is, is sort of taking this as, um, or viewing this as extra money. So you're not using it mentally. You don't have this all mentally earmarked. For I'm spending this on, on recurring expenses, like your mortgage, your rent, your utilities, that kind of thing.

But viewing it as money that should be used for one time expenses or for investing, that's that sorts of thing. Um, so it, I think that that is a big trap that you can fall into if you are. using this for just, you know, spending on your life. And then you find that your company is, your company stock has, has been reduced it, you know, let's say it drops 50 percent and then you can't afford to live your life anymore.

Especially as as people start to move up in the company and more of their [00:38:00] pay ends up being paid out in stock, that becomes a bigger and bigger issue.

[00:38:05] Tyler: So I just had a little bit of a waking nightmare. One of the things that I encounter with a lot of my clients is the desire to, I guess, like, I, I tend to call it forecasting, but like basically pre, you know, plan to spend the money that you haven't earned quite yet, but typically it's, that's just with like the regular income, this just takes us to a whole new level.

And that, yeah, so I'm glad you brought that point up because it's, it's very easy to count your chickens before they hatch sometimes,

[00:38:32] Alex: Yeah, absolutely. Especially when like, I mean, when you're given an offer letter, oftentimes that that's, it's. It's put out that way to you. So they don't say we're giving you 150, 000 in salary, and then we're giving you some unknown number in stock. That's not what they say. They say, we're giving you 150, 000 in salary, and then we're giving you 50, 000 in stock each year over four years.

So if you're mentally anchored around having that 50, 000, That is where you can [00:39:00] get into trouble.

[00:39:00] Tyler: Yeah.

Well, Alex, we just sure appreciate, you know, having you on as a guest and teaching us about this type of compensation and glad to know that there are people like you out there who provide this type of service. I think, you know, um, a lot of people could benefit from that.

[00:39:17] Alex: Well, thanks for having me on. It's been fun. I love chatting about this stuff.

[00:39:22] Steve: If folks want to get in touch with you specifically, what would you recommend?

[00:39:26] Alex: They can either follow me on LinkedIn. Like you said, that's where I'm very active, uh, Alex Crouch, or they can go to my website at techfp. com.

[00:39:37] Steve: Okay. Sounds good. Thank you, Alex.

[00:39:40] Alex: Thanks for having me

[00:39:41] Steve: And we'll be back for another episode in this series. You can email us in the meantime, and we'll see you again on another episode of It's Not About The Money.

Creators and Guests

Steve Nay
Steve Nay
Strategic tax advisor for solopreneurs. Enrolled Agent; Owner of Daybreak Tax LLC
Tyler Smith
Tyler Smith
Financial coach for working professionals
Managing your equity compensation, with Alex Crouch
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