[Pre-listing Company Equity: A Wisdom of "Paying Taxes Early"]

For employees or early investors with company equity incentives (ESOP), an counterintuitive tax wisdom is: the earlier you pay taxes, the lower the cost.

The core logic is that the tax on equity is calculated based on its fair value. When a company is still in its early stages and has a low valuation (for example, 10 million), if it can comply with the regulations to pay taxes on this portion of equity, then the tax base is locked in at a very low level. Although a tax payment is required at this moment, it is a relatively controllable cost.

In contrast, if you wait until the company successfully goes public and its market value skyrockets to tens of billions or even hundreds of billions, exercising your options or selling at that time would result in capital gains calculated in astronomical numbers. This not only represents a huge total amount but may also be classified into a higher tax bracket due to the nature of the income.

Do you or your friends hold company shares? How are you planning for this part of "future wealth" in the long term?

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Not an investment advice.

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