A question perhaps to help anybody else who finds themselves in this situation...
If one doesn't have the cash to prepay the taxes, where do you find a short-term lender for this?
Let's say your RSUs are worth $1M and you need to pay $220k in taxes in March, but you won't be able to sell the shares until a few months later.
In theory the $1M in public company stock seems like a fine collateral. But in practice, a recent IPO's stock can fluctuate drastically. Maybe they announce bad results in April, the stock goes down 50%, and you already paid taxes on $1M but now it's only worth $500k. An ordinary bank probably won't loan you the $220k with such a high risk collateral (I might be wrong).
If banks or rich friends are not an option, where do you get the $220k? Second mortgage on your home?
> If banks or rich friends are not an option, where do you get the $220k? Second mortgage on your home?
Paying taxes on phantom income is extremely risky. As you described, if there is a gap between the tax event and the liquidity timeframe, the value might disappear and you end up paying taxes on money you never had and never will have. A lot of people have lost everything on this.
It’s still possible if the shares’ value covers the interest payments. A shareholder will pay taxes only on the value received, while the rest is returned to the bank. So, the bank risks only the interest amount, which is manageable to assess based on the company’s performance.
If one doesn't have the cash to prepay the taxes, where do you find a short-term lender for this?
Let's say your RSUs are worth $1M and you need to pay $220k in taxes in March, but you won't be able to sell the shares until a few months later.
In theory the $1M in public company stock seems like a fine collateral. But in practice, a recent IPO's stock can fluctuate drastically. Maybe they announce bad results in April, the stock goes down 50%, and you already paid taxes on $1M but now it's only worth $500k. An ordinary bank probably won't loan you the $220k with such a high risk collateral (I might be wrong).
If banks or rich friends are not an option, where do you get the $220k? Second mortgage on your home?