098: Equity Compensation Tax Playbook with Greg O'Brien and John Malone

00:00 - 02:37 | Christopher Nelson: Did you know that it's not inevitable that you have to pay high taxes on your equity compensation? It's not. The reality is most people get horrible advice. If you really want to save money on your taxes, you need to be working with the right professionals. And today on this episode, we're going to be talking to them and we're going to be giving you tips and fundamental strategies that can save you thousands. Yes. Welcome to Managing Tech Millions. I'm your host, Christopher Nelson. And I will tell you, one of the worst things about making tech equity and earning it is the taxes that come with it. I have never, ever felt so much pain in my life than writing those checks and not knowing what I was going to get back. But the reality is there are fundamental ways that you can save on taxes. You just need to know the basics. And so if you're the type of person that wants to get the most value out of your equity compensation, today we're going to be talking with some tax strategists that are going to outline the basics, the fundamentals, the key things that you need to know that should be part of your everyday playbook of working for equity. Listen, after my first IPO, when I had to sit down and write out these very large checks, thousands and thousands of dollars, it was a painful moment. And it was at this moment that I realized there has to be a better way. And when you talk with certified tax planners or tax strategists, they say things like the tax code is a book of incentives. When you follow it, you actually pay less taxes. That was very different from the message I heard from my CPA who was saying, oh, here's what happened, here's what you owe. And it was sort of like, so sorry, too bad. Well, today we're gonna be talking with two tax strategists. One is a certified tax planner, the other one is a tax lawyer. They work hand in hand at Anomaly CPA. and they're going to be sharing with us fundamental tactics, what everybody needs to know in their playbook. They're also gonna dip into some advanced strategies. What are ways that if you wanna go deeper and you wanna save thousands and even save money against your active income, there are legal ways to do that today. I'm excited to introduce you to them. Let's get to the show. Okay, welcome Greg O'Brien, John Malone from Anomaly CPA. Thanks so much for joining me today.

02:37 - 02:39 | Greg O'Brien: Thanks for having us, Christopher.

02:39 - 02:45 | John Malone: Excited to be here and hopefully educate the listeners. Yeah, Christopher, thanks for having us. Always a pleasure hanging with you, that's for sure.

02:45 - 04:14 | Christopher Nelson: Yeah. Yeah. And I, I get juice talking to you guys too, because I think ultimately, uh, I love talking to people who solve real world problems, uh, especially for people that are in that, you know, 1 million to $30 million net worth. I know that you're, you're leaning into this community, really trying to help them sort of set the stage for you listening, right? The problem is most technology employees have this belief. that they're just going to have to pay taxes whenever they sell out of their equity compensation. And the reality is, and I've discovered this personally, is that if you plan and you're strategic and you understand some tactics that you can execute, you can save yourself hundreds of thousands of dollars. And it's the people that don't plan. It's the people that just sit on their equity and don't do anything with it for years and are very reactive to it. They end up paying the heavy price. And so this is where today I want to really cover off on What are certified tax planners? What are tax strategists? Who are these people that live out there that aren't, you know, I feel like there should be billboards everywhere. See a tax planner, CPAs, no, but they're not. And then walking through some tactics. So turning it over to you guys, let's start from the basics. Like what are certified tax planners or what falls under the category of tax strategists?

04:14 - 06:03 | John Malone: Yeah, yeah, sure. So I guess like to set the stage, I think, you know, at its basic form, like certified tax planners or tax strategists are definitely more forward thinking. They're more proactive in their approach, right? Like we're setting up milestones throughout the year so you can mitigate your tax exposure year in and year out before these things happen versus just like purely compliance, which is just, hey, you're giving us the numbers and then we're generating a tax return for you. And the result is what it is. And I think most tax professionals work in an environment that's high volume and preparation, right? They're doing a lot of tax returns for a lot of maybe complex or simple situations. And there's absolutely nothing wrong with that, right? Like that's a business model that serves a lot of people in the United States. But I think when you take on that model, you're not going to be able to do the more proactive and strategical work. We're certified tax planners, we're licensed through a nonprofit organization, and that mission is to spread tax strategy to accountants, advisors, and to our investors and business owners that we work with. So our focus is on advisory first, like strategy first throughout the year. So we can really predict what you're going to see when you prepare your tax return every year. So along every step in the way, we're identifying ideas, we're implementing them, and then we're maintaining them throughout the year. And really, your tax return becomes, hey, this is kind of the report of what we did, right? We saved you. We reduced your effective tax rate by x. We saved you this amount of money on this strategy. That's how we're looking at it versus just kind of like, hey, give me your stuff. Here's a tax return.

06:04 - 07:02 | Greg O'Brien: And I think to add to that, John, too, I think a lot of people are just not educated in exactly what the difference between tax preparation and tax strategy or tax planning is. And you wouldn't believe the amount of people, Chris, who are very high income individuals as well. that they'll reach out like this time of year and say, hey, I had a significant event last year. I'm nervous about the taxes. What should I do? And the unfortunate answer is there's not much you can do, right? Like when you already crossed over the year, you're into the new year. At this point, we're in reporting mode, right? We're retroactively reporting. Now, there are a couple of things you can do here and there, but most people are not going to save money on the preparation of their tax return, right? You're going to do it accurately and you get to report everything accurately that you've done. You're making money on this year's situation right now. So if I'm having a big event in 2025, I should be actively planning in February of 2025, not waiting until December, not waiting until 2026 to do that, because you're going to be disappointed in the results.

07:03 - 07:41 | Christopher Nelson: Right. And so just to read that back so that people can really understand, you know, what a CPA is, the way that I think about it in my technoid brain is a CPA is somebody like the CSI, right? They're drawing the chalk outline around the body. Hey, the crime's been committed. Here's what's done. I'm going to report what it is. Here's sort of what you owe. versus a CPA is more of a minority report. Like they want to try and look into the future and help you proactively plan and say, what could happen? I want to try and help you prevent these things from happening to you. And those, go ahead.

07:42 - 08:51 | Greg O'Brien: One way to look at it, Christopher, you know, as a CPA myself, it's, it's, it's a very broad designation, right? So when we get licensed, it's, you're tested on a variety of different things and, We're expected to know everything from how to audit a publicly traded company to governmental accounting standards in taxes, only about one fourth of, of that education process. Now, what one comparison, right? Not to, um, not to, uh, overemphasize what we do, but think of it like a medical profession. There are general practitioners and then there's a podiatrist, right? Or there's a cardiologist. And all we're saying is that we're just niched into something a little bit more specific, a typical CPA or a mid regional firm. What they're doing is just more general practitioner work, right? They're saying, Hey, if you're a, you know, if you have a W-2 or you have seven small businesses or you own a hundred pieces of real estate, like we'll work with you and we'll prepare your tax return, right? It's a kind of a mishmash of a bunch of different things where tax planners are a little bit more focused on what they're looking for and their expertise and their feedback is going to be a little bit more specific. And why is that? It's because we have more room and time. to do that advisory because we're not taking on that high, high volume of a mishmash of work.

08:52 - 09:25 | Christopher Nelson: Right. And I think the one way I remember when we started working together, so for full transparency to everybody, we do work together and have a working relationship. And I remember what you said that blew me away is, you know, you said the tax strategy is actually a book, the tax code is a book of incentives, and that if you follow it correctly, then you pay less or no taxes. And I just thought that is a completely different way of thinking about the problem.

09:26 - 10:46 | Greg O'Brien: Well, I mean, to relate to current events, right? Like today, the state we're recording this, there's going to be a big vote in the House about 2025 tax legislation, if you think about it, right? The current administration versus the prior administration, they're trying to incentivize certain behaviors. And the way that they primarily do that is through the tax code. So if they want to stimulate certain parts of the economy or try to have businesses or individuals do certain things, the way that they typically do that is through the tax code. An easy example of this, the prior administration really focused on green energy, right? Love it or hate it, it doesn't matter. They're focused on green energy. They passed an $800 billion tax package on green energy as tax planners, right? Our job is to educate our clients of, Hey, here are different investment techniques that you can use that are going to produce tax savings because the government wants you to allocate money here. Now let's talk about another example, right? Forever. The government, whether they say explicitly or not, has incentivized people to invest in things like oil and gas production domestically. and tax benefits back to the 80s on this through every administration. So why are they doing that? It's because they are trying to stimulate public policy. So if you think about it that way, versus just rules you're following, you might open some doors for you.

10:47 - 11:10 | Christopher Nelson: And so let's think about it. So we have technology employees that are starting to get stock compensation and they start aggregating, you know, a few hundred thousand dollars, maybe they're getting close to a million dollars. What do you think is the right time when, you know, a technology employee who's working their way to make some million should start engaging a tax strategist or tax plan?

11:10 - 12:08 | Greg O'Brien: You know, we say certainly before there's some type of exit scenario. Why is that? The longer someone waits, frankly, the harder it is. Now, we often end up in this position where we say, Hey, you know, like if you had done some pre, we call it pre-equity planning, then some pre-equity planning, you could have done X, Y, and Z. But once that trigger was pulled or that event happened, your opportunities really cut in half. So there are some post equity planning techniques, but you're going to be more limited. So the earlier, at least, at least start thinking about it, right? And start researching your options, the better. If you, if you all of a sudden you're like, Oh, I'm going to have this event in a month and I'm panicking, it's going to be hard to find someone that can help you adequately in that amount of time. Or if you've already had an exit or exiting some positions, again, the milk is kind of a little bit spilt at that point. It's harder for us to clean up that situation there. So I can just say the earlier, the better, and the more planned out you can be from an investment perspective, the better for us.

12:09 - 12:42 | Christopher Nelson: Right. So when somebody, and so let's talk about it from a private public company perspective, right? We're talking ISOs, NSOs, RSUs, right? So if you have incentive stock options, there needs to be a pre-planning exercise. If you have a few hundred thousand dollars worth of those types of options that you think could pop in some type of an exit, that is an appropriate time to start looking around for a certified tax planner or tax strategist to say, how should I pre-plan for these options?

13:00 - 14:25 | Greg O'Brien: The people that we might talk to might not completely understand how these equity instruments work from a tax perspective, and nor should they, because to be honest, a lot of tax professionals don't understand how they work either completely. So they are confusing. Now, in an ISO, for example, someone should really be planning out their exercise schedule, right? Because we always talk about what's called the crossover amount, right? Where can I exercise just enough ISOs to hit the crossover or AMT, which is this archaic old school tax system called their alternative minimum tax. Where does that intersect with your income tax liability? And you want to just go right to that limit where you don't cross over there. And then every dollar over that's a little bit of spillage. That's kind of a difficult scenario to plan out. So you need to work with someone generally to do that. So if you're planning that way and then you say, okay, now I have the ability to have a qualifying disposition, which is going to be long-term capital gains. I can start playing this out, but it's really, as you can see, it's really a full picture versus maybe you have RSU is a completely different scenario. Maybe you have a different scenario. Now you have an ordinary income tax situation. So it's really first about understanding what are the elements of your equity stack that you have. And then from there, start to create that plan of divesting, or at least understanding what your tax is going to look like in each given year.

14:26 - 15:34 | Christopher Nelson: Yeah. So I think just to put a bow on this, right? Certified tax planners, tax strategists, their philosophy, the way that they work is let's get ahead of it. Let's see what we have here. Let's start looking around the corner, doing some scenario planning, because I know that the evidence is striking. The people that do that, that plan ahead of time, save hundreds of thousands, if not millions of dollars, and then it's, conversely, the people that don't, that are in that reactive mode, I think the worst case scenario is then things just flip to ordinary income. It clicks into your tax bracket. You don't have any type of write-offs or plan around that as well. So then you just pay the full nut. Yeah. So let's talk a little bit about, you know, what are some of the, you know, common mistakes and or myths that come up with tax efficient selling? Right. So I know like some people say, Hey, I'll just wait till the stock price shoots to the moon and then I'll deal with taxes later. What are, what are some of your responses to, to something like that?

15:35 - 17:07 | Greg O'Brien: Well, kind of Chris or back to, I just kind of alluded to previously, right. Is that if you, if you wait too long, you may not be understood either to exercise or to sell. You may not be understanding some of these taxes that you're, you're facing, right. Or you're accruing now. A lot of people, rightfully so, they're working for a company, they probably believe in the mission, but they a lot of times do bet on it, believing that they're going to continuously rise in stock price. And that can be a trap. I hate to say it goes against the mission of your company or to not believe in it, but you do, you got to be smart about that. Hey, should I divest from some of these positions someday? Because these days you're one tweet or one stroke of a pen. of something changing that could really affect your company, right? So you have to be careful about that, having a large gain on paper and what that can actually mean. And if you're kind of asleep at the wheel, that could cause a problem, right? So we have seen clients and we've seen people we've talked to that have had their stock go the other way very, very quickly. And they end up in a more of a panic scenario where they are under stress and pressure to decide to hold or sell. And that's, And you probably know this better than anyone, Christopher, having been in this world, like you don't want to be in that position where you're stressed out of like, do I sell this off? What are my implications of doing this? And you're under the gun because you're literally watching a ticker drop, right? That's not a pleasant position to be in. No. The second thing is from an opportunistic perspective.

17:08 - 17:08 | Christopher Nelson: Yeah.

17:08 - 17:51 | Greg O'Brien: I think that people, if people are waiting too long, they may be again, losing opportunities to spread out potential gains anyways, to be able to get some, uh, liquidity and be able to pursue other things in life, pursue other investment opportunities in life. So, you know, is there a perfect time to sell? Probably not, but we do believe in people having a plan. Um, and it's no different than, you know, we work with a lot of cryptocurrency investors. Some of the smartest ones we work with, they have a plan to sell at certain intervals of the price of their particular crypto they're investing in no matter what happens. Right. So I think this feeling of like, ah, I'm just going to grow and hold it forever. can be a little bit of a false feeling sometimes.

17:52 - 19:29 | Christopher Nelson: Oh, it truly is. And I think that, you know, part of smart tax planning goes hand in hand with divestiture planning, because ultimately, you know, the biggest mistake that I see people making in tech is that they just treat their RSUs or their equity compensation, like a savings account. And they think, oh, I'll just put it in there. It's safe. It's just going to keep growing up into the right. And depending on the company, depending on the market, I've seen tragedies strike where things have been halved in a very short period of time. So I think it is wise to think about the fact that stock prices aren't always going to go up. You want to have a clear divestiture strategy and be partnering with tax planners to harvest that over time. Um, so let's, let's get into the meat of the conversation. Let's just sort of jump straight ahead because I really want to give people some meaty things to talk about. And I think, you know, what, what we just started touching on, right. Is, you know, uh, gradual selling and tax efficient share selection. You know, if, if somebody is, if I'm coming to you and I'm saying, okay, I have now, you know, and let's not talk about any pre-planning strategies, but I came to you, we'd gone through an IPO. I have some ISOs that do have some capital gains. I just got some RSUs, some ESPPs. How would you sort of walk me through a scenario to start setting up some gradual selling strategies to reduce my tax burden?

19:32 - 20:18 | John Malone: I think like, well, from just the overall standpoint, like. You know, we definitely want to use gradual selling just to lower taxes. Like you just compared to just like, uh, like a lump sum sale. Um, so obviously if we're selling off a larger block of appreciated stock in a single year, like you could push yourself into a higher federal tax bracket, which we want to avoid. So like there's always that analysis, like year over year, like looking at the total income picture, um, to just make sure that we're, uh, we're managing that properly. Um, so if there's opportunities to gradually sell or split sales over multiple tax years to spread out the gains and potentially stay in lower tax brackets, that's always going to be a win-win. That's always going to be something that we're going to be trying to do.

20:19 - 21:47 | Christopher Nelson: I want to pause on that because that's something that has been working for me for years in working with tax strategists. Here's the year where my wife's not working. That's a year to now let's harvest that would be equivalent to her income. How do we thread the needle, get through on those things? Maybe it's a year where I only worked half a year. I ended up leaving a job halfway through. But these are when you're working with tax strategists that are saying, here's a dollar amount. Now I can go and be setting limit orders or doing covered calls and I can be harvesting some of this off in a very strategic way. I want to give people insight into how that partnership works. And it does also go back to though, I think for the companies that I went through IPO with, I always went in there with an investment of my time and talent first. So I believed in the company. Then after being an insider for a number of years and understanding how it operated, I would walk out of that company. And if I was gonna go into a gradual selling plan, it's because I had a belief that the company would still do well and I wasn't in a, okay, hey guys, I got to huddle and protect my assets. I think this thing's going to tank. It's like, no, I know that quarter of a quarter, they're going to continue to deliver, uh, up into the right. Let me, let me take my time and do this.

21:47 - 22:40 | John Malone: Yeah, very true. And also too, like to your point, like it's not like the, in analyzing an income situation for a given year, it's not just an analysis of, hey, income might be down this year, so it's a good opportunity to sell. It's also like, what else is kind of funneling into the picture? Maybe you have other investments that are generating losses that could make it a more opportunistic time. And maybe there's other parts to the picture. Because I think that's like, if we back up to just tax strategy and tax planning, It really is putting pieces of the puzzle together in a way that generates the best outcome. There's so much of that. And I think that metaphor just lends itself to what we're talking about here, right? It's just making sure we're matching up years, losses, opportunities, gains, and just having it mold together in the best way possible.

22:40 - 24:22 | Greg O'Brien: I was saying something very simple, right, that's overlooked a lot. It's really the concept of when you are doing this gradual selling, what order are you doing it, right? So we'll call this specific identification, meaning are you specifically identifying which lots of the shares you want to sell, or are you just going with a default method, which would be typically what we call FIFO, which is first in, first out, meaning the first lots that were vested in the first ones that are ultimately sold. It's not always a good idea, right? Because your spread, which would be the fair market value of the sales price, less your original cost basis, which is the value investing is going to be higher in that case, right? So you are, you are allowed as a taxpayer to select specific identification as your method of accounting and equity. Uh, typically a lot of crypto investors will do this because they can play different games with the price of crypto, but the same concept applies here. So we often see people selling the wrong tranches, right? They're selling the ones that have the highest spread. And again, there actually may be a case where you, like Chris, where you mentioned, I only worked half the year or my wife didn't work this year. Great. I have more room. I actually should sell the higher gain ones right now. But most people are trying to minimize that situation. So you may need to look at that or splitting those lots between multiple years. So again, it sounds sort of intuitive and obvious, but a lot of people don't do that. And they're just willy nilly selling things and not looking at the actual lots they're selling in, in the order in which things are being sold. You're talking about thousands of dollars of difference of taxes over time by doing these little things correctly.

24:23 - 26:13 | Christopher Nelson: Well, and this is what I think it's so important for people to understand. And what I want to shed light onto is that if you are managing your millions effectively, you do need to understand the stock that you own in equity compensation. You need to understand the cost basis. You want to be able to understand the spread of what it was granted at, what you purchased it at, your exercise price, and what it's valued at today. You want to be able to understand that across your tranches. And then this is where I'm a huge advocate for working with tax planners, having teams that they're incented to help you save money, right? Looking across the table, because ultimately, and this is why I love getting on the phone and talking with you guys, because it's a game and it's a strategy game. And when you win, you keep more of the money that you already made, right? And I can't think of a better outcome, right? Is that an opportunity? So gradual selling, and the thing is too, is like gradual selling is also, if you think about it, a reverse sort of dollar cost averaging, right? When you're investing in a stock, they say, hey, if you're continuing to invest at regular intervals, right, that's where you're gonna be able to maximize or be able to spread out sort of your risk and get into a good position over time. This is really the reverse of that, if you're trying to, in your stock, again, if there's not an emergency, that you're trying to just slowly sort of exit that position over time. So one of the things that I know many people don't know about, but have been, I really enjoy this play, which is donating appreciated stock instead of cash. Walk us through that play.

26:15 - 26:43 | John Malone: Yeah, it's a powerful strategy. And really, it's just like, the brass tacks of it is like, it's a double benefit, right? So like, if you're donating the stock, like you're first avoiding any of the capital gains that you would have experienced on the stock, and then you're getting a fair market value, ordinary income tax deduction with that donation. So it's really kind of a double benefit in that respect.

26:44 - 27:43 | Christopher Nelson: Right, and the mechanics, just so that people understand, is to donate fully appreciated stock if you're going to go into whoever is holding your stock, whether it's E-Trade or Schwab, and you're going to then donate it from there, fully appreciated. There's a way. You have to look up the instructions. But you would then transfer the ownership of that set of stocks to the nonprofit, and you're doing that instead of selling. You're just saying, hey, I'm gonna give you 30 shares, 50 shares, 100 shares, and they're taking it at that fully appreciated value instead of you selling it, paying taxes on it, and then investing. If you're doing this, you're essentially donating off of your balance sheet instead of your income statement. That's another way to think about it. It's very, very powerful because, you know, as John just told us, right, you get, you get sort of the twofer.

27:44 - 28:04 | John Malone: Yeah, that's, that's the power of it. Right. It's like you are removing it from your personal balance sheet. Right. So you're removing that gain event, but then you're also getting the benefit of the tax deduction. And if you're, If you're charitably inclined, there's so much opportunity in that respect. And there's that end of it, too, which is a fulfilling one.

28:04 - 29:51 | Greg O'Brien: I say to add to it, too, a little bonus here is donor advised funds, again, like what Christopher just explained, it is very straight. It is actually very easy to do all this. And people can usually execute this in a couple of weeks in December to get this all done. The next step up the ladder we typically recommend is something called a CRT, which would be a charitable remainder trust. And there's different ways to do that. You might hear the terms like CRUT or maybe a NIMCRUT. There's these different acronyms out there. But essentially what that difference is between a CRT and a donor advised fund would be the same benefits, right? I'm donating highly appreciated stock. I'm getting a fair market value, ordinary income deduction, charitable deduction on the way in. I'm completely avoiding capital gains inside of the trust. The difference here is the key word is remainder. You actually are getting an annuity payout back to yourself over the term of 20 to 30 years. And 10% of the principal at the end goes to your given charity. So typically a little higher net worth type of strategy here, but again, it's not that, it's not that complex of a strategy. A lot of people will pull these off. Um, so if you're like, Hey, I, I'm really looking. at a large event here, you might want to consider something like a CRT that could protect your family with an annuity stream, but also get some pretty hefty upfront tax benefits. So as you can see, there's multiple layers to these types of strategies. So if we as tax planners heard the client or the person's charitably inclined, we would kind of step up our ladder, right? And then maybe someone's really charting charitably inclined. They could set up what's called a private foundation, which is essentially their own charity, right? That they could fund year after year after year. So all of these kinds of strategies, Christopher, have multiple entry points and levels, but it's our job to determine where someone should fit into that ladder.

29:51 - 29:57 | Christopher Nelson: What, so what is, what is sort of the size you think, what's the net worth of somebody who's going to get into a CRT?

29:58 - 30:44 | Greg O'Brien: A CRT typically, um, I would say it's, it's someone with a net worth of 5 million plus, and then a donor, sorry, a, um, a private foundation. I'm not going to say net worth, but. you typically have to be prepared to donate about a hundred K per year into that. And again, private foundations are really just an operating charity business and you can have different structures of things that flow through that. But you'd really want to be, Hey, I have a mission to give back and I want to be active in that mission versus a donor advised fund is like, I'm going to be passive in this mission. I'm going to fund this and I'm going to, I'm going to tell fidelity, the charitable fund just to distribute to these 16 charities versus private foundation. I want to get my hands dirty. I'm going to be running campaigns and kind of doing different stuff. So again, that's more of we try to look at what is the person looking to accomplish?

30:45 - 31:23 | Christopher Nelson: Right. And I have been a user of donor advised funds for years, and I'm a huge fan of Daffy. I don't know if you guys have been exposed to Daffy, but I think especially for tech employees who enjoy good fintech, daffy.org, I'll put that in the show notes, is an easy way to get spun up on a donor advised fund real quick. And it's very easy from, I think, the larger shops to be able to donate stock directly into it. I did at the end of last year and it was just so painless. Because sometimes donating from the stock vendor to your charity, depending on how mature your charity is, that can cause a little brain damage. Just FYI.

31:26 - 31:27 | Greg O'Brien: Absolutely.

31:27 - 32:16 | Christopher Nelson: Yeah. So what about, I think, the third strike? So we've covered off on gradual selling, partnering with a certified tax planner, getting tax efficient share selection, just optimizing what would be considered the straightforward standard process of how do I divest out of this? Then there was the donating appreciated stock instead of cash. That's going to save you money right away, especially if you're charitably minded. The third one is offsetting gains with tax law harvesting. And I also think what I want to throw into this one, I'm going to throw you guys a little wild card I think, especially because technology employees I know love doing venture capital and can wind up with a capital loss from like a venture going south. I think talking a little bit about, you know, the strategy of how you use losses to offset gains is really important.

32:16 - 35:38 | Greg O'Brien: Yeah. So a couple of things here. First and foremost, a lot of now typical trading platforms will simply allow you to opt into tax off last harvesting. So they're selling certain securities, right? And you're going to lock in a capital loss. That capital loss can offset capital gains. A couple other versions of this that we see people doing in practice. A lot of people participated and still participate in various crypto booms that are out there, which is kind of like a weekly high and low at this point. Here's a key thing, right? Cryptocurrency, so let's take Bitcoin, for example. There is no concept of what's called a wash sale in crypto. Why is that? The IRS, right or wrong, deems crypto to be property. So it's closer to real estate than it is to, say, Apple stock. That being said, let's just say that you bought one share of Bitcoin when I was at $100,000. And let's just say overnight, which can happen, it drops to $85,000. Well, you can simply sell that one share of Bitcoin you purchased at 85,000, lock in that loss and immediately rebuy it the same day, maybe the day after. What'd you just do? You still have one Bitcoin, but you now have a $15,000 capital loss. So it is a huge loophole. It is a problem for the government, but they have yet to address that. And it's completely legitimate, completely illegal to do that currently. So we'll see people say, hey, I do get this crypto. I'm going to watch the market as it drops. I'm going to sell, but I'm going to rebuy because I believe in the rebound. So, that's another example of something people do. Now, be very careful. What I just explained, you never do that with actual stock, right? If Apple was going up and down and you sell and rebuy, that's called a wash sale and it's simply disregarded… You can do it, it's just a disregarded transaction. So, if you get a broken statement, you'll sometimes notice a little W on one of the columns, that's what that is. Your tax preparer would have to disregard that loss. So just be careful with that. But there are some really easy strategies with tax less harvesting. Last thing I'll say is you mentioned VC investing. Here's another kind of bonus tip on that. So VC investing, yep, they can go, you know, probably three and five end up going bad, but you got to hit those two. If you do have a loss, you should review with the ultimate company of what, what the company was structured as, right? Because If it was a domestic C corp and it follows certain things, you can actually claim what's called a section 1244 stock loss. Why would you claim a 1244 stock loss? It converts a capital loss to ordinary losses. So if you're a married couple, and let's just say that you had a hundred thousand dollar investment into your friend's startup, they raised a couple million bucks. It didn't go anywhere. It failed. They shut down. You received nothing back. you could claim a 1244 loss and take a $100,000 ordinary write-off, which can offset everything, W2, everything, versus, a lot of people don't know this, they just claim a capital loss, which can offset capital gains, but if you have no capital gains, you only get a lousy $3,000 capital loss in perpetuity. So, knowing some of these little unique things like that can save you a ton of money. The government is never gonna say, hey, Christopher, you failed to claim the 1244 stock loss, we'll give you one more chance to do that. They're not going to tell you about it. Right? So you need to practically know these types of things and be able to ask the right questions.

35:39 - 35:49 | Christopher Nelson: So let me ask you a quick question on the 1244. Is that a balance that then would carry over? So if I didn't use that hundred thousand dollars against taxes in year one, does that carry over for another year?

35:51 - 36:19 | Greg O'Brien: Correct. If you did not have enough income to be offset by that, it would carry forward with you. Typically, they call it an operating loss carry forward. Now, just to be clear, the limits there are $50,000 single, $100,000 married, but it's an old provision that's been around for a while. Why do they have these provisions? It's really the inverse of section 1202, which is the, hey, I won big, now I don't pay taxes. This is saying, hey, we want you guys to go take risks in startups. If it fails, we're going to give you a little bit of a benefit.

36:20 - 36:39 | Christopher Nelson: Okay. Got it. And then also talk a little bit about the regular capital loss, because I think for many technology employees, right, they can be, you know, have some, uh, a large position of equity compensation. They have a capital loss like that would then give them an opportunity to sell some, uh, some stock in that year.

36:40 - 38:10 | Greg O'Brien: Absolutely. And I think it's very important for you to understand. A lot of people don't know what their capital losses are. So if you just have an E-trade statement, or maybe you have a Betterment account or something like that. in a given year, you could have thousands of dollars of capital losses. You don't really, maybe not paying attention. So look at your tax return, right? Your tax return is going to have what's called a capital loss carryover schedule on it. It's usually one of the first few pages of the return that I'll say, Hey, Christopher, you have $12,000 of short or long-term capital loss carry forwards. And if I am the taxpayer, right, I would say, okay, great. I can safely absorb 12,000 of the gains next year. and not have a tax consequence of doing so. So it's very important to understand those kinds of things. And we've seen people come into us with literally multi-million dollar capital loss carryovers that they weren't completely aware were there. So it's very important to understand those things. And here's one last thing I always tell people. The government is not going to index those for inflation. So if you earned a capital loss in 2024, for example, and you don't do anything or pay attention to it or try to offset that in 2094, it's going to be the same number. And that's pretty disappointing, right? So they will not index that for inflation, but here's what they will do. They will increase your tax rates. So you got to think that way of, Hey, I have an asset. I have a tax asset on my balance sheet being a loss carry forward. How can I strategically find a way to use that for the concept of time value money?

38:11 - 39:43 | Christopher Nelson: Yeah. I mean, that's one of the things that I got from you guys, from working with you guys as well, is this whole concept of, you know, having these carry forward losses on your balance sheet, right? This is when I really started accumulating a depreciation and now some of these other capital losses and things. And this is what. This to me is sort of this counterbalance to investing, to generating income out of your portfolio. When you're carrying these negative balances, what that means is that then you're going to pay, I'm going to pay less taxes. And that becomes very, very powerful in understanding how you're managing that over time and continuing to aggregate some of those, you know, negative balances that continue to offset taxes. But also at the same time, the other thing, the key concept you said is take as much as you can in the current year, like get really focused on how can you really squeeze the most out of that? Because when you do think about the time value of money, you want to move that forward. And all of these things that we're talking about here are key, what I would call, you know, millionaire mindsets where you're, you're focused on how you actually play the strategic game of money and really understand all of the things that are available from a tax perspective. I did want to quickly dip Greg back to the, so that we talked a little bit on the stock losses for venture capital, but a vanilla venture capital, even if it doesn't have the stock loss, that will actually, you can write that as a capital loss, correct?

39:44 - 40:28 | Greg O'Brien: Correct. Yeah. If it's a, if it's a typical investment and you don't have any kind of return from that investment, it would be a capital loss. With the thing on that, Christopher, is though it's not as intuitive as, say, a stock loss. We're going to get a nice paper statement in the mail that says, hey, you sold Apple and you lost $3,000. The company is probably not going to send you anything, actually. So you're going to have your records in order and you're going to work through your tax repair and they'll know how to claim that, a business loss. So again, those things can get missed and lost in translation. If I were a client, I would proactively tell my CPA, hey, I invested in this venture backed company. It failed. Here's the documentation. Can you help me claim this loss? Because you're not going to get a nice little paper statement that tells you that.

40:29 - 42:45 | Christopher Nelson: Yeah, again, this is so important to call out, right? These are fundamental strategies. When you wanna save yourself money on taxes, you are an investor, you're managing your own portfolio. I have experienced this personally, and it was with a great friend of mine. And the reality is, they just didn't know. I was lucky at the time, this predates you guys, but I was lucky to be working with a tax strategist at that point that said, you need to go get this paperwork, this form. They weren't sure about it. I had her talk with their people. form generated, boom, all of a sudden, the loss was recaptured, I was able to, this was when I was doing some of the Splunk divestiture, okay, boom, we had a good year, we were able to sell off some more stock, and it was great. But understanding how to manage the losses, because I do think that you know, it goes back to what we said earlier, right there. The tax code is a book of incentives. They want people making investments. Why do you think big dollar companies are making these investments? They sort of shrug off losses and they keep moving forward because they realize that those losses are going to become these negative balances and move forward on the balance sheet. Right? When you play this game correctly, you know, you can turn this. This is what I was trying to explain to my boys as I was trying to explain to them a little bit about this depreciation and negative balance sheet. Believe it or not. Yes, 10 and 12 year olds. But they're curious. They're curious why I'm on the phone with John and Greg so much. And, you know, the point that I tried to explain to them was the fact that you can take a loss and you can turn it into a tie, right? You can at the last moment say, yep, the investment didn't turn out the way it did, but now I have this paperwork. I'm going to bring this into my full financial picture and I'm not going to lose as badly. It's not the same as getting the win and all the upside, but at the same time, it's downside production. So I think it's really important for people to understand. So those, I think we covered off on the fundamentals, the gradual selling, right? Getting tax efficient share selection, donating appreciated stock instead of cash, offsetting gains with tax law harvesting. And then we did spend some time talking about capital losses, stock losses. Are there any fundamentals that I'm missing out before we move on? Anything that you would say, hey, this is part of the basic book of tricks.

42:49 - 42:55 | John Malone: No, I don't think so. I think a lot of the, some of the other things that we want to dip into might be more in like the advanced bucket.

42:55 - 42:55 | Christopher Nelson: Yeah.

42:56 - 43:04 | John Malone: Those are kind of the more fundamental, like operational. uh, blocking and tackling items that we would, we would always be addressing kind of on an evergreen basis.

43:05 - 43:36 | Christopher Nelson: Excellent. Okay. Let's move into the, uh, the advanced, I think the advanced and you brought up something and I want to try and, uh, sort of a bucket these two together, but there's, there's definitely opportunity zone investing is one. And then you also have. I would just call it in general, and you can correct me if I'm wrong, like tax incentive investing, because I think about things like oil and gas. Oil and gas investing has some tremendous tax benefits, but walk us through the opportunity zone investing first, and then we can touch on the other ones.

43:36 - 45:23 | John Malone: Yeah, for sure. So I mean, this definitely coincides with the whole book of incentives thing, right? Like, yeah, this is literally just an incentive, like the government won, or in 2017, when opportunity zones, you know, kind of started to really kind of take off, like, that was the main thing is we wanted to generate investment in some of these in some of these areas. So I think the thing about opportunity zones is that they're very flexible. So you don't need to, the gain event can already happen, right? So there's that flexibility. And you have 180 days to invest your gain into a qualified opportunity zone. It doesn't need to be all of it. It can be some of it. So that's another flexibility component to it. And you get a deferral in your gain until the end of 2026, right? So you have to pay the gain, pay the tax on your file. Um, so that's w a little bit more of uh, in opportunity zones because frame has obviously been a lot of, you know, with the current administration that deferral timeframe is Um, so, you know, we hope like that. But, um, but the part of it, but the more any appreciation in that investment, in that Qualified Opportunity Zone, if it's held for 10 years, is completely tax-free. So that is kind of the carrot at the end. It's the gain deferral in the short term, and then the tax-free exit on the appreciation on the back end. So that's really what, at its simplest form, what a Qualified Opportunity Zone investment does.

45:25 - 46:02 | Christopher Nelson: Yeah, I think again, finding the right investment, finding the right operator, I think there's, it's a very interesting play, especially when you are looking to exit out of concentrated technology stock positions, it gives you the opportunity to look at different real estate opportunities out there. And this is, again, all of a sudden you're diversifying and you're getting some of these interesting pieces that come into this tax picture. There's different levers that you can play. Yeah. Totally. Yeah. Yeah. I think too, it's just like you said, right?

46:02 - 46:29 | John Malone: These are more often than not, they're private investments, right? So it's like you need to find the right people to work with, the right funds to work with. So there's that portion of it too. So I think we work with a lot of our clients to try to find good fits in that respect and try to help them navigate that world.

46:29 - 46:45 | Christopher Nelson: Yeah. It is a whole other world, right? When you do get to these advanced strategies, I think it is important that you have people that surround you that understand what are the benefits, what are the details behind it, because there's a steep learning curve. Totally. Yeah.

46:45 - 47:14 | John Malone: And we see all the time too, because the people are going to market this, right? Like, because people kind of just know the buzzword, Opportunity Zone. And you'll see these kinds of marketing materials that are like, hey, invest in this opportunity zone. But it really is only meaningful if you have a gain. You need to have that gain to really kind of make this strategy work. Otherwise, you're just investing in a real estate fund or whatever it is. So there's a lot to kind of navigate in that world.

47:15 - 47:22 | Christopher Nelson: So then what about these then preferred tax treatment other investments? Talking about oil and gas for a moment.

47:23 - 49:42 | Greg O'Brien: Yeah, so a couple of things. We always say investing in hard assets, real estate being one of them, is typically going to produce the best tax benefits. Now, two things, oil and gas, like I alluded to before, it's been in the tax code forever, and despite changes in administration and policy, it's always actually survived, and that just goes to show the power of big industry lobbies that we have. And why is it a special investment? Because oil and gas is the only thing that you can invest in and simply trade cash and receive a direct tax deduction right away. An easy example, if you invested $100,000 into an oil and gas partnership, you're probably going to receive an $85,000 year one deduction. So if you're at a high tax rate, your cash on cash return is going to be pretty large. So people will often use this tool in the year of an event to offset income. In future years, you do receive, of course, a return on that investment. And oil and gas is more like a real estate development type of return, right? It's a little bit riskier. And John alluded to before, you got to make sure you know the person you're investing with in oil and gas, because I always make the joke, if they were selling cars two years ago and now they're selling oil and gas, it's probably not a good idea to do that. Because again, the benefits are so lucrative from a tax perspective, it can get over-marketed. The second thing I'll say is two plays in real estate. Number one, Christopher, you mentioned before, what if your spouse is not working well? Maybe it's February of 2025, you know what? We're going to go out and buy three, four, five rental properties this year. And maybe your spouse manages all the rental properties. She can probably become what's called a real estate professional for tax purposes. You can do all the cool stuff we talked about, cost segregation, bonus depreciation, et cetera. Produce large losses through that real estate. Said real estate lawsuit will then offset your gain scenario from your exit position, right? Number two, maybe your spouse does work and maybe you don't have time to do that. You can invest in short-term rentals and essentially receive the same benefits if you follow a set of rules that we have. So again, thinking more in hard assets, that's going to be a good idea, or we call them alternative investments. Those are other ideas that you can do, but you need time, right? If you do this in November or December, it's probably not going to work out. So you've got to make sure that you have time in planning to get this done.

49:42 - 49:42 | null: 100%.

49:43 - 51:43 | Christopher Nelson: And I mean, I think that's, that's a good transition into, you know, just as we're sort of reflecting back, sort of putting a bow on this thing is, is tax planning is the long term strategy. And I always thought, before I started working with you guys, I always thought, okay, every year I'm trying to save, I wanna save this or I have this coming in, I wanna save that. I think you helped me go from sort of, I would say, short-term tax planning that was really around equity compensation to taking a step back and saying, hey, Christopher, you wanna try and shave 3% a year off your tax exposure. And you want to do that year over year. And it's almost like this reverse compounding where, okay, now I'm saving more and more every single year. And the more I've thought about it like that, I see that I'm starting to reap the benefits. And I think that's, if there's one thing that I could communicate to people listening today, it's, I believe that your tax, certified tax planner, tax strategist is the most important member on the team of your solo family office. They're your deep partner that's going to allow you to keep more of what you've made, period. And it truly is a long-term, year-over-year strategy. The more you can be planning years ahead of time and getting some things on the table, when new tax codes open up, when new plays come together, you're going to be ahead of the curve and you're going to be able to understand, is it worth it? How much is this going to save me? And then ultimately over time, you're going to be building a portfolio that is sending you income that is tax protected. You know, and what, what, what that is, is that, you know, are you paying 30% or 0% is going to be dependent on how effectively you are managing your business.

51:44 - 52:52 | Greg O'Brien: Absolutely. And I think we often talk about the concept of lifetime taxes, right? So people get very wound up like the year to year taxes, but actually it makes sense. Sometimes you pay more tax this year because it'll mean you pay less tax. Next year, this is a great example this year, actually, right? There's a lot of uncertainty in the tax code this year because a lot of the original Trump tax cuts are set to expire in December unless they extend it. So if I'm a business owner, I'm an investor, I'm probably thinking, okay, let's see what happens for 2026 before I make too many 2025 moves, right? Maybe taxes will go down next year. That makes sense to maybe kick start income next year versus this year, right? Now you mentioned before, maybe that's a one or 2% difference, but year over year, time after time, after 30, 40 years of working, that one or 2% adds up. So we often tell people it's a long play, right? We want to save a lot of money in the short term, but it's the long game where you're going to really, really save money. And the most successful famous families in this country have done perpetual tax deferral and tax planning for generations, which is why they're in the position they are.

52:53 - 54:20 | Christopher Nelson: So I think then, you know, putting a bow on it, right? Selling stock without a plan is a bad idea, right? That is just pain waiting to happen. And I just, I'll take a moment. I have been there. I have sat over the checkbook, misty, weeping because I worked so hard to get it and I had to write it away because I just, I didn't know. I didn't know. Now I'm living life differently. And I can tell you that the opposite is true is that when you go and you put in a lot of work on your tax plan and you get back, hey, you know, my wife is still working. Here's how much we're getting back against her active income. It's joyful. It's like, okay, the plan is working and we're seeing a clear path forward. It's a good thing. I'd say that the fundamentals for technology employees are gradual selling, tax loss harvesting, donating appreciated shares, and ultimately working with a certified tax planner who can help you put together a long-term plan and exit well. There's definitely some advanced plays and I definitely do not recommend doing those alone. But if you are getting to the point where you're managing your millions and you have accumulated, you know, four or five, six, $7 million, and you're not working with a certified tax planner, now's the time to, to lean in. What did I leave out guys?

54:21 - 54:32 | Greg O'Brien: No, this is all good stuff. And I think we always encourage people to think ahead and to reach out and get help before you're in a position where you're kind of stressed or panicking.

54:33 - 54:34 | Christopher Nelson: One hundred percent.

54:34 - 55:23 | John Malone: And I would add to Christopher that, you know, it's just it goes with getting ahead. But it's also like even to the advanced level or like the next steps like that are just beyond what we characterize as the fundamentals, like it doesn't necessarily mean they're going to cost more money. They're going to make your life so overly complex. If you have the right advisor on your team, you can make these things apply and be simple to your situation that aren't going to cost you more money. At the end of the day, we're only going to put our clients in positions where they're going to make a return on the investment of their money and their time. as it relates to their tax savings on a given strategy. So I think there's no reason to be afraid of jumping into those types of situations.

55:24 - 56:28 | Christopher Nelson: Yeah, I don't think so at all. And I think that's a good note to leave it on, right? If you're, if you're working with, how do you know you're working with the right certified tax planner, you're working with the right certified tax planner. When they say, we're looking at your scenario, we have to partner together, right? I have to do some work. You're going to do some work, but in the end, we're going to save you X. That's going to cost you Y. So then to your bottom line, you get Z. Right? That's the way that it works right? This should be an incentive based relationship where you're looking to save us a large amount of money of which your expenses and fees come out of and then I get the benefit of that. That's to anybody if they are not having that ROI conversation with their certified tax strategist, they could be doing it wrong. Right? But ultimately, that's the way it should work, fellas. Christopher. It's always good, man. Thank you so much for sharing this with everybody. I'm excited to have you here on Managing Tech Millions. I'll make sure and drop all your contact information in the show notes. Awesome. And I know we'll be talking soon. Yes, sir. Thanks for having us.

56:28 - 56:29 | John Malone: Always an extreme pleasure.

56:30 - 58:03 | Christopher Nelson: Thanks so much. What? Can you believe that? That was a power-packed episode and I could have kept going forever. In fact, if this is something like, if you wanna see more content like this, go to managingtechmillions.com, subscribe on the website for the newsletter, hit reply to one of those newsletters and let us know. We want to know if this is content that you like. But I'll tell you, I felt so good that they laid out the fundamental step-by-step playbook. These were things that I learned. It took me years and a lot of pain and writing a lot of checks and a lot of crying. But now you have that in your arsenal to go execute against. And some of those advanced strategies, I would encourage you that if those are things that interest you, that align with the focus and where you want to take your life and your business, go check those out as well. Ultimately, as managers of your portfolio, and tech equity is a large portion of it, working with the right tax professionals is going to be a game changer. Because guess what? You are going to be able to leverage and use more because you're keeping more of what you make. So thank you so much for enjoying this episode, being a part of this journey. If you want to know more, managingtechmillions.com. We are on Substack. We have a podcast that you can follow. We have a newsletter that you can subscribe to. We're also on YouTube. Just go into YouTube and type in Managing Tech Millions and it'll bring up our page. We appreciate you and we'll see you in the next episode. Thanks.