Cisco's taxes

Brad DeLong delong at econ.Berkeley.EDU
Tue Oct 10 08:04:01 PDT 2000

>On Tue, 10 Oct 2000, you wrote:
>> > From dbreslin at Mon Oct 9 20:27:48 2000
>> > Is the tax liability transfer really a wash?
>> It's better than a wash; CSCO "doesn't pay tax" on $2.8B of profit,
>> but employees pay tax on $7B of gains ... do the math ...
>> /jordan
>My point was simply that the income would be taxable
>to somebody or something. The whole thrust of the article
>was that the cost of the options was deductible to the
>corp and by implication, lost forever.
>It probably isn't a wash. First off, the rates on individuals
>differ from those on corporations. If taxed at the top marginal
>individual rate of 39.6, there is more revenue on the individual
>side. Some of this also might be taxable under the payroll tax,
>though don't hold me to that (2.9% for Medicare applies to
>uncapped wage & salary). Second, either side will have
>different alternative ways of reducing their exposure.
>It is true that some things are double-taxed, such as
>dividends and the first $76,200 of wages. So we'll be
>studying Comrade DeLong's proposal.

Now when is the premium between the exercise price of the option and the current price of the stock taxable? Are you taxed on the spread when you exercise the option, and is your basis for the stock then the price of the stock on the day you exercised the option? Or is your basis the exercise price of the option, and are you taxed on the whole bundle when you sell the stock?

I think the first, but all of a sudden I'm not sure.

I used to know this...

Brad DeLong -- J. Bradford DeLong Professor of Economics, U.C. Berkeley 601 Evans Hall, #3880 Berkeley, CA 94720-3880 (510) 643-4027 voice (510) 642-6615 fax delong at

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