How Peter Thiel Turned a Roth IRA Into a $5bn Tax-Exempt Piggy Bank
June 25, 2021 11:44 AM Subscribe
Roth IRAs were intended to help average working Americans save, but IRS records show Thiel and other ultrawealthy investors have used them to amass vast untaxed fortunes. (ProPublica, June 24, 2021)
Over the last 20 years, Thiel has quietly turned his Roth IRA — a humdrum retirement vehicle intended to spur Americans to save for their golden years — into a gargantuan tax-exempt piggy bank, confidential Internal Revenue Service data shows. Using stock deals unavailable to most people, Thiel has taken a retirement account worth less than $2,000 in 1999* and spun it into a $5 billion windfall. [...]
What this secret information reveals is that while most Americans are dutifully paying taxes — chipping in their part to fund the military, highways and safety-net programs — the country’s richest citizens are finding ways to sidestep the tax system. One of the most surprising of these techniques involves the Roth IRA, which limits most people to contributing just $6,000 each year. But some of the wealthiest Americans found ways to grow their Roth IRAs to millions — or even billions — of dollars, tax-free. To identify those who have amassed fortunes in retirement accounts, ProPublica scoured the tax return data of the ultrawealthy for IRA accounts valued at more than $20 million. [...] Among this rarefied group, ProPublica found, the term “individual retirement account” has become a misnomer. Rather than a way to build a nest egg for old age, the accounts have morphed into supercharged investment vehicles subsidized by American taxpayers.
--
*In 1999, Thiel paid $0.001 per share — yes, just a tenth of a penny — for 1.7 million shares in PayPal. [...] Thiel purchased his founders’ shares in PayPal through his Roth IRA during PayPal’s formation.
--
Previously: Inside the Tax Records of the .001%
Thiel previously on MetaFilter.
Over the last 20 years, Thiel has quietly turned his Roth IRA — a humdrum retirement vehicle intended to spur Americans to save for their golden years — into a gargantuan tax-exempt piggy bank, confidential Internal Revenue Service data shows. Using stock deals unavailable to most people, Thiel has taken a retirement account worth less than $2,000 in 1999* and spun it into a $5 billion windfall. [...]
What this secret information reveals is that while most Americans are dutifully paying taxes — chipping in their part to fund the military, highways and safety-net programs — the country’s richest citizens are finding ways to sidestep the tax system. One of the most surprising of these techniques involves the Roth IRA, which limits most people to contributing just $6,000 each year. But some of the wealthiest Americans found ways to grow their Roth IRAs to millions — or even billions — of dollars, tax-free. To identify those who have amassed fortunes in retirement accounts, ProPublica scoured the tax return data of the ultrawealthy for IRA accounts valued at more than $20 million. [...] Among this rarefied group, ProPublica found, the term “individual retirement account” has become a misnomer. Rather than a way to build a nest egg for old age, the accounts have morphed into supercharged investment vehicles subsidized by American taxpayers.
--
*In 1999, Thiel paid $0.001 per share — yes, just a tenth of a penny — for 1.7 million shares in PayPal. [...] Thiel purchased his founders’ shares in PayPal through his Roth IRA during PayPal’s formation.
--
Previously: Inside the Tax Records of the .001%
Thiel previously on MetaFilter.
I was a 90s goth kid with a love of Batman: The Animated Series, Gargoyles and the works of Anne Rice.
What I'm saying here is that I came into adulthood primed to be the cheering section for a reclusive gay billionaire credibly rumored to be a vampire and Peter Thiel is so phenomenally shitty he somehow managed to fuck that up.
posted by Parasite Unseen at 12:18 PM on June 25, 2021 [72 favorites]
What I'm saying here is that I came into adulthood primed to be the cheering section for a reclusive gay billionaire credibly rumored to be a vampire and Peter Thiel is so phenomenally shitty he somehow managed to fuck that up.
posted by Parasite Unseen at 12:18 PM on June 25, 2021 [72 favorites]
How much of any actual worth would this person have created without lying, cheating, or stealing? “But it’s legal,” such a criminal would state with the assured intonation of a 3rd-base-born bro, while he works every day to change the laws that he’d otherwise break (and sometimes does). If you can’t earn money the old fashioned way, Peter, you just drag the playing field down to you level then shit all over it while you climb up past it.
I’m sure the revolution has his name high on the “first up against the wall” eraserboard.
He’s amassed so much power and is so far removed from what it means it be alive, he barely deserves to be called a person nor enjoy the rights of one.
Thanks for the informative post.
posted by armoir from antproof case at 12:20 PM on June 25, 2021 [4 favorites]
I’m sure the revolution has his name high on the “first up against the wall” eraserboard.
He’s amassed so much power and is so far removed from what it means it be alive, he barely deserves to be called a person nor enjoy the rights of one.
Thanks for the informative post.
posted by armoir from antproof case at 12:20 PM on June 25, 2021 [4 favorites]
heads. spikes. walls.
this is just going to be my fucking default comment for these scum
posted by lalochezia at 12:20 PM on June 25, 2021 [9 favorites]
this is just going to be my fucking default comment for these scum
posted by lalochezia at 12:20 PM on June 25, 2021 [9 favorites]
This article is great, but totally buried the lede (which Iris highlighted here): the reason Thiel's Roth is so big is not by design and is not common across the rich, but that he paid $0.001 per share of what became PayPal. He just happened to do so inside of his Roth.
The article also mentioned that such a price should have merited an investigation. Of course, it didn't. It's not about the Roth. It's about enforcement.
Many other rich have big Roth IRAs because they are inherited. Others have converted, which involved paying the taxes on them (but of course they came up with "losses" to count against the gains). It's not about the Roth, it's about enforcement.
The IRS has been underfunded and thereby intentionally neutered. It's not about the Roth, it's about enforcement.
posted by Dashy at 12:36 PM on June 25, 2021 [64 favorites]
The article also mentioned that such a price should have merited an investigation. Of course, it didn't. It's not about the Roth. It's about enforcement.
Many other rich have big Roth IRAs because they are inherited. Others have converted, which involved paying the taxes on them (but of course they came up with "losses" to count against the gains). It's not about the Roth, it's about enforcement.
The IRS has been underfunded and thereby intentionally neutered. It's not about the Roth, it's about enforcement.
posted by Dashy at 12:36 PM on June 25, 2021 [64 favorites]
Thiel is that rare(?) evil billionaire who feeds off the lifeblood of younger generations both figuratively and literally.
posted by Atom Eyes at 12:40 PM on June 25, 2021 [7 favorites]
posted by Atom Eyes at 12:40 PM on June 25, 2021 [7 favorites]
The SPAC Man Method: Inside the Billionaire Rush for Riches [ungated link] - "Billionaires are coming up with increasingly imaginative — and perfectly legal — manoeuvres to get rich quick as the Securities and Exchange Commission struggles to get a grip on the boisterous blank-cheque market."
I Was Taught From a Young Age to Protect My Dynastic Wealth [ungated link] - "A common ideology underlies the practices of many ultra-wealthy people: The government can't be trusted with money."
also btw...
Top U.S. Officials Consulted With BlackRock as Markets Melted Down [ungated link] - "The world's largest asset manager was central to the pandemic crisis response. Emails and calendar records underscore that critical role."
BlackRock plans more employee support after review of complaints - "BlackRock Inc Chief Executive Larry Fink said on Thursday the company would create new support channels for employees and start evaluating the conduct of senior leaders, including himself, after a legal review of intolerant behavior at the world's top asset manager."
posted by kliuless at 12:56 PM on June 25, 2021 [11 favorites]
I Was Taught From a Young Age to Protect My Dynastic Wealth [ungated link] - "A common ideology underlies the practices of many ultra-wealthy people: The government can't be trusted with money."
also btw...
Top U.S. Officials Consulted With BlackRock as Markets Melted Down [ungated link] - "The world's largest asset manager was central to the pandemic crisis response. Emails and calendar records underscore that critical role."
BlackRock plans more employee support after review of complaints - "BlackRock Inc Chief Executive Larry Fink said on Thursday the company would create new support channels for employees and start evaluating the conduct of senior leaders, including himself, after a legal review of intolerant behavior at the world's top asset manager."
posted by kliuless at 12:56 PM on June 25, 2021 [11 favorites]
It's about enforcement
Republicans have been hard at work for the last decade to damage the IRS. Funding it again could be a good start to recovering taxes from high-end scofflaws, including Thiel.
posted by They sucked his brains out! at 12:58 PM on June 25, 2021 [11 favorites]
Republicans have been hard at work for the last decade to damage the IRS. Funding it again could be a good start to recovering taxes from high-end scofflaws, including Thiel.
posted by They sucked his brains out! at 12:58 PM on June 25, 2021 [11 favorites]
It's not about the Roth, it's about enforcement.
Porque no los dos?
Seriously; a roth - aimed at enabling modest retirements! - shouldn't be able to accumulate this much, period, by law. The law should not require the honesty of the share-issuer. If the law were written better, it wouldn't allow this amount of tax-free gain, period.
As well as undoing the neutering of the IRS, tax laws need to be written with assumptions baked into them from day 0 that rich people will be trying to fuck the poor, and there needs to be vast, injurious liabilities incurred that will make generational thieves (and their advisors, who should ALSO be liable) think twice before executing the scam du jour.
posted by lalochezia at 1:11 PM on June 25, 2021 [16 favorites]
Porque no los dos?
Seriously; a roth - aimed at enabling modest retirements! - shouldn't be able to accumulate this much, period, by law. The law should not require the honesty of the share-issuer. If the law were written better, it wouldn't allow this amount of tax-free gain, period.
As well as undoing the neutering of the IRS, tax laws need to be written with assumptions baked into them from day 0 that rich people will be trying to fuck the poor, and there needs to be vast, injurious liabilities incurred that will make generational thieves (and their advisors, who should ALSO be liable) think twice before executing the scam du jour.
posted by lalochezia at 1:11 PM on June 25, 2021 [16 favorites]
My new analogy I'm workshopping is that the ultra-rich are financial blackholes, in the sense that once they amass some wealth-singularity, the primary action of that money is to suck more money out of everyone else and society at large. They become so big that entire sectors of industry fall in to orbit around these money blackholes. Treasuries have to create more money for the rest of us even to have any money, meanwhile the blackholes have become so massive that they're warping the entire space-money continuum pulling all of reality across the event-horizon.
The universe is, in aggregate, contracting, in a very very clumpy manner.
posted by glonous keming at 1:20 PM on June 25, 2021 [52 favorites]
The universe is, in aggregate, contracting, in a very very clumpy manner.
posted by glonous keming at 1:20 PM on June 25, 2021 [52 favorites]
Treasuries have to create more money for the rest of us even to have any money, meanwhile the blackholes have become so massive that they're warping the entire space-money continuum
This tracks excellently to me and the rub is that they're refusing to let the rest of us have anything - money, healthcare, roads, bridges, jobs, freedom, anything.
posted by bleep at 1:29 PM on June 25, 2021 [20 favorites]
This tracks excellently to me and the rub is that they're refusing to let the rest of us have anything - money, healthcare, roads, bridges, jobs, freedom, anything.
posted by bleep at 1:29 PM on June 25, 2021 [20 favorites]
How is it that they can't just prosecute him and/or Paypal for fraud? He self-dealt a stake worth far more than $1700 to his Roth IRA for only $1700.
Doesn't it follow that if he's allowed to do this, then anyone should be allowed to bypass the cap?
Alice deposits a "rare NFT" (created by her, evaluated at 1 cent) to her Roth IRA.
Bob deposits a "rare NFT" (created by him, evaluated at 1 cent) to his Roth IRA.
Bob buys Alice's NFT for $500K.
Alice buys Bob's NFT for $500K.
They've now each effectively deposited $500K into their own Roth IRAs without it counting toward the contribution cap.
posted by explosion at 1:33 PM on June 25, 2021 [40 favorites]
Doesn't it follow that if he's allowed to do this, then anyone should be allowed to bypass the cap?
Alice deposits a "rare NFT" (created by her, evaluated at 1 cent) to her Roth IRA.
Bob deposits a "rare NFT" (created by him, evaluated at 1 cent) to his Roth IRA.
Bob buys Alice's NFT for $500K.
Alice buys Bob's NFT for $500K.
They've now each effectively deposited $500K into their own Roth IRAs without it counting toward the contribution cap.
posted by explosion at 1:33 PM on June 25, 2021 [40 favorites]
First against the wall when the revolution comes...
he thinks to himself knowing full well the revolution is never coming.
posted by tommasz at 1:34 PM on June 25, 2021 [7 favorites]
he thinks to himself knowing full well the revolution is never coming.
posted by tommasz at 1:34 PM on June 25, 2021 [7 favorites]
Same as it ever was...
posted by jim in austin at 1:34 PM on June 25, 2021 [4 favorites]
posted by jim in austin at 1:34 PM on June 25, 2021 [4 favorites]
it's not about the Roth, it's about enforcement.
Yes, someone should have enforced that 1.7 million shares of anything should be worth more than $1700. If he was paying 20% on $5 billion, you could fund a lot of IRS investigators for the money.
The thing that stuckout on the article was the other billionaires with fats Roths did it with a co version and this was explicitly allowed by the GW Bush admin to get to rich people to pay a little more in taxes now so the high ling term tax cuts didn't score so bad on immediate budgets. That's not a tax loophole that is a fraud on all middle class taxpayers, committed by the government
posted by CostcoCultist at 1:36 PM on June 25, 2021 [7 favorites]
Yes, someone should have enforced that 1.7 million shares of anything should be worth more than $1700. If he was paying 20% on $5 billion, you could fund a lot of IRS investigators for the money.
The thing that stuckout on the article was the other billionaires with fats Roths did it with a co version and this was explicitly allowed by the GW Bush admin to get to rich people to pay a little more in taxes now so the high ling term tax cuts didn't score so bad on immediate budgets. That's not a tax loophole that is a fraud on all middle class taxpayers, committed by the government
posted by CostcoCultist at 1:36 PM on June 25, 2021 [7 favorites]
President Biden's American Families Plan (fact sheet) (.pdf) seeks to: Increase the top tax rate on the wealthiest Americans to 39.6 percent; end capital income tax breaks and other loopholes for the very top ("... Without these changes, billions in capital income would continue to escape taxation entirely"); [Biden] is also calling on Congress to close the carried interest loophole so that hedge fund partners will pay ordinary income rates on their income just like every other worker.
From the WH fact sheet: "The President’s tax agenda will not only reverse the biggest 2017 tax law giveaways, but reform the tax code so that the wealthy have to play by the same rules as everyone else. It will ensure that high-income Americans pay the tax they owe under the law—ending the unfair system of enforcement that collects almost all taxes due on wages, while regularly collecting a smaller share of business and capital income. The plan will also eliminate long-standing loopholes, including lower taxes on capital gains and dividends for the wealthy, that reward wealth over work. Importantly, these reforms will also rein in the ways that the tax code widens racial disparities in income and wealth."
From the .pdf link, the plan "would also increase investment in the IRS, while ensuring that the additional resources go toward enforcement against those with the highest incomes, rather than Americans with actual income less than $400,000. Additional resources would focus on large corporations, businesses, and estates, and higher-income individuals."
Appropriate taxation estimated revenue: Biden wants to raise $1.5 trillion by taxing the rich. Here’s how (CNBC, April 29, 2021)
posted by Iris Gambol at 1:38 PM on June 25, 2021 [12 favorites]
From the WH fact sheet: "The President’s tax agenda will not only reverse the biggest 2017 tax law giveaways, but reform the tax code so that the wealthy have to play by the same rules as everyone else. It will ensure that high-income Americans pay the tax they owe under the law—ending the unfair system of enforcement that collects almost all taxes due on wages, while regularly collecting a smaller share of business and capital income. The plan will also eliminate long-standing loopholes, including lower taxes on capital gains and dividends for the wealthy, that reward wealth over work. Importantly, these reforms will also rein in the ways that the tax code widens racial disparities in income and wealth."
From the .pdf link, the plan "would also increase investment in the IRS, while ensuring that the additional resources go toward enforcement against those with the highest incomes, rather than Americans with actual income less than $400,000. Additional resources would focus on large corporations, businesses, and estates, and higher-income individuals."
Appropriate taxation estimated revenue: Biden wants to raise $1.5 trillion by taxing the rich. Here’s how (CNBC, April 29, 2021)
posted by Iris Gambol at 1:38 PM on June 25, 2021 [12 favorites]
@CostcoCultist
Having been involved in only one failed startup, that share price still does not seem surprising to me for the stage 1999 Paypal (Confinity, still?) was at.
posted by bastionofsanity at 1:46 PM on June 25, 2021 [1 favorite]
Having been involved in only one failed startup, that share price still does not seem surprising to me for the stage 1999 Paypal (Confinity, still?) was at.
posted by bastionofsanity at 1:46 PM on June 25, 2021 [1 favorite]
intended to help average working Americans save
To me (someone who has benefited from the approximate Canadian equivalent) it has always seemed that they were set up to encourage I-got-mine selfishness alongside fear that social programs can't be depended on.
posted by clawsoon at 2:01 PM on June 25, 2021 [8 favorites]
To me (someone who has benefited from the approximate Canadian equivalent) it has always seemed that they were set up to encourage I-got-mine selfishness alongside fear that social programs can't be depended on.
posted by clawsoon at 2:01 PM on June 25, 2021 [8 favorites]
It's not about the Roth, it's about enforcement.
Porque no los dos?
Seriously. When the Roth was created, you couldn't use it if you earned more than $110,000. A mechanism created for the middle class was subverted.
posted by CheeseDigestsAll at 2:04 PM on June 25, 2021 [16 favorites]
Porque no los dos?
Seriously. When the Roth was created, you couldn't use it if you earned more than $110,000. A mechanism created for the middle class was subverted.
posted by CheeseDigestsAll at 2:04 PM on June 25, 2021 [16 favorites]
Thiel did nothing illegal or even particularly complicated. As with the previous ProPublica tax article they are highlighting the way rich people disproportionately benefit from our tax system. The problem isn't that Thiel did it, the problem is the system is designed to allow it.
In particular here we have a tax benefit intended to help people save for retirement. It's a way for a reasonably well off person to put away a few hundred thousand dollars over a lifetime without taxes on the gains or payments out of the fund at retirement. The problem is there's nothing stopping a billionaire from using it to shelter literally billions in gains from any taxes at all.
As the article notes, Thiel is the biggest beneficiary of this particular gimmick but is by means not the only one. The article talks about others with $10M+ Roth IRAs kicking around.
posted by Nelson at 2:07 PM on June 25, 2021 [3 favorites]
In particular here we have a tax benefit intended to help people save for retirement. It's a way for a reasonably well off person to put away a few hundred thousand dollars over a lifetime without taxes on the gains or payments out of the fund at retirement. The problem is there's nothing stopping a billionaire from using it to shelter literally billions in gains from any taxes at all.
As the article notes, Thiel is the biggest beneficiary of this particular gimmick but is by means not the only one. The article talks about others with $10M+ Roth IRAs kicking around.
posted by Nelson at 2:07 PM on June 25, 2021 [3 favorites]
Seriously. When the Roth was created, you couldn't use it if you earned more than $110,000.
It's only $140,000 now, which is pretty consistent with inflation. However, a lot of the super-rich "earn" much, much less than this. They do everything with leverage and offsets and report little or no income. The structures that allow them to do this are more pernicious than Thiel's cute little use of a Roth to shelter his founder's shares (which I agree should probably be considered some kind of fraud).
posted by mr_roboto at 3:03 PM on June 25, 2021 [7 favorites]
It's only $140,000 now, which is pretty consistent with inflation. However, a lot of the super-rich "earn" much, much less than this. They do everything with leverage and offsets and report little or no income. The structures that allow them to do this are more pernicious than Thiel's cute little use of a Roth to shelter his founder's shares (which I agree should probably be considered some kind of fraud).
posted by mr_roboto at 3:03 PM on June 25, 2021 [7 favorites]
Thiel did nothing illegal or even particularly complicated.
That may not be correct. His deposit may in fact have been in violation of laws, it's just that the IRS didn't have the resources to audit it.
Depending on how many shares existed at that time, he very likely owned something like 10-20% of the company. Is it really likely that the company was actually worth only $10K at that time?
Paypal did their IPO 3 years later and offered 5.4M shares at $13/each.
This implies that in 3 years, a share increased in value 13000-fold. Companies just do not grow that fast.
It really sounds like he committed fraud in the evaluation of his stock purchase. "It wasn't prosecuted" is not the same as "he did nothing illegal."
posted by explosion at 3:29 PM on June 25, 2021 [20 favorites]
That may not be correct. His deposit may in fact have been in violation of laws, it's just that the IRS didn't have the resources to audit it.
Depending on how many shares existed at that time, he very likely owned something like 10-20% of the company. Is it really likely that the company was actually worth only $10K at that time?
Paypal did their IPO 3 years later and offered 5.4M shares at $13/each.
This implies that in 3 years, a share increased in value 13000-fold. Companies just do not grow that fast.
It really sounds like he committed fraud in the evaluation of his stock purchase. "It wasn't prosecuted" is not the same as "he did nothing illegal."
posted by explosion at 3:29 PM on June 25, 2021 [20 favorites]
Supposedly, in ancient Athens, when they needed to raise money for a large public project like a ship or a temple, they would select citizens to be responsible for covering the cost by lot. However, if you were selected, you could name any other citizen who you thought was better able to pay it. That person would then have to either pay for the project or swap their entire property with yours, and you'd then be responsible for covering the cost from your newly-acquired property. I'm not saying this was a better system than our system of taxation, but there is a certain elegance to that approach in terms of rendering loopholes of this sort moot, which I sometimes think about when reading stories like this. Like, okay Peter, you claim your IRA is only worth $1700? Then you'll be perfectly happy to swap it with someone with a $10000 IRA and pay for road maintenance from that pool, right?
posted by biogeo at 3:29 PM on June 25, 2021 [20 favorites]
posted by biogeo at 3:29 PM on June 25, 2021 [20 favorites]
Just FYI, it is completely standard practice for founder shares to be issued at a near-zero price at the time of incorporation.
posted by kickingtheground at 3:30 PM on June 25, 2021 [4 favorites]
posted by kickingtheground at 3:30 PM on June 25, 2021 [4 favorites]
Why is it legal at all to hold privately held companies in an IRA? Or anything that doesn’t have a public and well established valuation? How is that necessary to help people save for retirement? If IRAs were restricted to savings/CDs and publicly traded stock/bond funds, that eliminates this gaming from shady valuations and works just fine for people saving in the normal way (with cash from your income… as opposed to “saving” weird or easily gamed assets like startup stock). Restrict to index funds too while you’re at it…
posted by brendano at 3:33 PM on June 25, 2021 [14 favorites]
posted by brendano at 3:33 PM on June 25, 2021 [14 favorites]
Just FYI, it is completely standard practice for founder shares to be issued at a near-zero price at the time of incorporation.
I don't object to the price of the sale. I object to the valuation of his interest in the company as only $1700 for the purposes of depositing it into a tax-shielded account.
If an artist were evaluating their works as having value equal to the raw materials, depositing the controlling interest into a Roth IRA, and then selling those works on the open market as investments, they'd clamp down on that as tax evasion.
As I explained in my dumb NFT example above, if what Thiel did is considered legal, then there is effectively no limit to how much someone can deposit to their account tax-free.
posted by explosion at 3:41 PM on June 25, 2021 [10 favorites]
I don't object to the price of the sale. I object to the valuation of his interest in the company as only $1700 for the purposes of depositing it into a tax-shielded account.
If an artist were evaluating their works as having value equal to the raw materials, depositing the controlling interest into a Roth IRA, and then selling those works on the open market as investments, they'd clamp down on that as tax evasion.
As I explained in my dumb NFT example above, if what Thiel did is considered legal, then there is effectively no limit to how much someone can deposit to their account tax-free.
posted by explosion at 3:41 PM on June 25, 2021 [10 favorites]
As I explained in my dumb NFT example above, if what Thiel did is considered legal, then there is effectively no limit to how much someone can deposit to their account tax-free.
Stipulated first of all that what Thiel did was a cheat of the system, not what IRAs are intended for, and a loophole that should be plugged...
This scheme (purchasing founder's stock with a Roth IRA) is pretty interesting from a legal and regulatory point of view. I found this blog entry that goes into the complexities in some detail. It seems that one thing that would prevent the IRS from calling this a prohibited transaction is that there's case law supporting the low valuation of founder's shares for tax purposes. Maybe they'd be able to act in the case of your (clearly fraudulent) NFT example?
posted by mr_roboto at 4:13 PM on June 25, 2021 [4 favorites]
Stipulated first of all that what Thiel did was a cheat of the system, not what IRAs are intended for, and a loophole that should be plugged...
This scheme (purchasing founder's stock with a Roth IRA) is pretty interesting from a legal and regulatory point of view. I found this blog entry that goes into the complexities in some detail. It seems that one thing that would prevent the IRS from calling this a prohibited transaction is that there's case law supporting the low valuation of founder's shares for tax purposes. Maybe they'd be able to act in the case of your (clearly fraudulent) NFT example?
posted by mr_roboto at 4:13 PM on June 25, 2021 [4 favorites]
Somebody who knows more about tax than I do said:
but it is legal and very easy for anyone to do a backdoor roth. (you contribute already-taxed money to an empty IRA, then rollover to roth)
So perhaps there's no need to do the NFT dance (although I certainly wouldn't agree that it's "clearly fraudulent." Who, exactly, is being defrauded?)
[eta: after further discussion, I forgot the $6k limit to a Roth deposit. So you would still want to use the clearly not fraudulent NFT approach to capitalize on the amazing volatility and price increase in the NFT market.]
posted by spacewrench at 5:18 PM on June 25, 2021 [1 favorite]
but it is legal and very easy for anyone to do a backdoor roth. (you contribute already-taxed money to an empty IRA, then rollover to roth)
So perhaps there's no need to do the NFT dance (although I certainly wouldn't agree that it's "clearly fraudulent." Who, exactly, is being defrauded?)
[eta: after further discussion, I forgot the $6k limit to a Roth deposit. So you would still want to use the clearly not fraudulent NFT approach to capitalize on the amazing volatility and price increase in the NFT market.]
posted by spacewrench at 5:18 PM on June 25, 2021 [1 favorite]
Who, exactly, is being defrauded?
It's straightforward tax fraud. Evading the capital gains tax.
posted by mr_roboto at 5:35 PM on June 25, 2021 [12 favorites]
It's straightforward tax fraud. Evading the capital gains tax.
posted by mr_roboto at 5:35 PM on June 25, 2021 [12 favorites]
After 1999, Thiel would never again contribute money to his Roth, tax records show. He didn’t need to. In just a year’s time, the value of his Roth jumped from $1,664 to $3.8 million — a 227,490% increase [...] in 2002, eBay purchased PayPal. That same year, Thiel sold the shares, still inside his Roth [...] The tax-free proceeds poured into his account. By the end of 2002, Thiel’s Roth was worth $28.5 million, tax records show. If he had held his shares outside of the Roth in a normal investment account, Thiel would have owed the IRS 20% of his gains and owed another 9% to California tax authorities. Because the shares were in a Roth, he had no tax bill when he sold them, saving him millions.
There's a pretty great graphic in the article, referenced in RakDaddy's comment, tracking Thiel's ballooning Roth account as he's buying cheap shares in still-private start-ups, practicing tax avoidance, and preaching modest living to the little people. In 2003, Thiel used the Roth account to invest in Palantir, the data analytics company he co-founded (hilarribly: "Even the IRS has a $99 million contract with Palantir to comb through data to identify tax cheats"); in 2005, he funds Facebook; in a 2006 Forbes column, headlined “Warning: Save, Save, Save,” Thiel lamented the low household savings in the U.S. and called for most Americans to live within their means. “Forgo the new kitchen and sundeck,” he wrote. “Shoot to put away 15% of the paycheck.” His closing advice: “Living modestly and saving well is better than dying broke.”
In an interview on the website Big Think, Thiel said the U.S. tax system has “fairness problems” in which “you have super rich people paying a lower rate than people in the middle or upper middle class.” The answer wasn’t taxing the rich more, he said, but “taxing the middle class and the upper middle class a lot less” and cutting their dependence on expensive programs such as Medicare and Social Security. By then, Thiel had purchased a Ferrari and had bought and sold a penthouse in the San Francisco Four Seasons.[...]
By the end of 2008, the Roth was worth $870 million [...] By 2019, Thiel’s holdings had grown so vast and diverse that his $5 billion was spread across 96 subaccounts inside his Roth.
Mitt Romney & the other Bain Capital goons get a mention in the piece, for how they exploited their non-Roth IRAs.
posted by Iris Gambol at 5:50 PM on June 25, 2021 [5 favorites]
There's a pretty great graphic in the article, referenced in RakDaddy's comment, tracking Thiel's ballooning Roth account as he's buying cheap shares in still-private start-ups, practicing tax avoidance, and preaching modest living to the little people. In 2003, Thiel used the Roth account to invest in Palantir, the data analytics company he co-founded (hilarribly: "Even the IRS has a $99 million contract with Palantir to comb through data to identify tax cheats"); in 2005, he funds Facebook; in a 2006 Forbes column, headlined “Warning: Save, Save, Save,” Thiel lamented the low household savings in the U.S. and called for most Americans to live within their means. “Forgo the new kitchen and sundeck,” he wrote. “Shoot to put away 15% of the paycheck.” His closing advice: “Living modestly and saving well is better than dying broke.”
In an interview on the website Big Think, Thiel said the U.S. tax system has “fairness problems” in which “you have super rich people paying a lower rate than people in the middle or upper middle class.” The answer wasn’t taxing the rich more, he said, but “taxing the middle class and the upper middle class a lot less” and cutting their dependence on expensive programs such as Medicare and Social Security. By then, Thiel had purchased a Ferrari and had bought and sold a penthouse in the San Francisco Four Seasons.[...]
By the end of 2008, the Roth was worth $870 million [...] By 2019, Thiel’s holdings had grown so vast and diverse that his $5 billion was spread across 96 subaccounts inside his Roth.
Mitt Romney & the other Bain Capital goons get a mention in the piece, for how they exploited their non-Roth IRAs.
posted by Iris Gambol at 5:50 PM on June 25, 2021 [5 favorites]
Roths are supposed to be an investment vehicle for the middle classes, people put a (legally) limited amount of (already taxed) money in, wait until retirement, can take out the profits without paying tax.
A simple law change saying that the amount you can take out without tax cannot be more that the increases of the Dow/NASDAQ pl,us say 20% over that period, the rest must be taxed as capital gains (so 25%+) would allow Roths to do as they were originally intended without this sort of abuse
posted by mbo at 6:15 PM on June 25, 2021 [2 favorites]
A simple law change saying that the amount you can take out without tax cannot be more that the increases of the Dow/NASDAQ pl,us say 20% over that period, the rest must be taxed as capital gains (so 25%+) would allow Roths to do as they were originally intended without this sort of abuse
posted by mbo at 6:15 PM on June 25, 2021 [2 favorites]
Also here in New Zealand Thiel was somehow granted citizenship in some particularly dubious circumstances, we have a law that allows the very wealthy to move here, invest and become citizens (currently in abeyance due to covid, hopefully we can nuke it).
Somehow this was granted (by a previous RW govt) even though he hadn't actually met the residency requirement, now it has turned out that for his 'investment' in NZ he 'moved' part of his Roth to NZ (not sure how you can do that and still have it be a Roth) - and how can money you can't actually access at the time even be considered entirely 'yours'
posted by mbo at 6:23 PM on June 25, 2021 [8 favorites]
Somehow this was granted (by a previous RW govt) even though he hadn't actually met the residency requirement, now it has turned out that for his 'investment' in NZ he 'moved' part of his Roth to NZ (not sure how you can do that and still have it be a Roth) - and how can money you can't actually access at the time even be considered entirely 'yours'
posted by mbo at 6:23 PM on June 25, 2021 [8 favorites]
even though he hadn't actually met the residency requirement
Thiel spent a mere 12 days; it's kind of stunning: "[T]he billionaire had failed to meet even 1 per cent of the typically required 1350 days of in-country residence in the five years prior to being granted citizenship." Thiel "courted" citizenship, promising investments and donations, as painstakingly laid out in How Peter Thiel Got New Zealand citizenship (The New Zealand Herald, Jan. 2017) ("A spokesperson for Thiel said the billionaire’s total investment to date in local tech firms was $50m.").
... Six months after the Santa Monica ceremony that had made [Thiel] a citizen, the mission listed on Valar Ventures’ website — which had previously billed itself as having been “founded to help grow New Zealand into a hub of technological progress” — was rewritten to remove references to the country that had just gifted him his new nationality.[...] When Thiel became involved, Xero was loitering on the start-up crossroads to success or failure and had a share price of just $1.50. The company’s stock went on to pass $40, and the company is now one of New Zealand’s largest with a market capitalisation in excess of $5b. [...] The support for Xero — from which various Valar vehicles would make hundreds of millions of dollars in capital gains as the share price surged — is the most tangible legacy of Citizen Thiel.
Re-reading Thiel’s letter today, with the benefit of hindsight, it seems other non-binding claims made during his bid for citizenship are less fulfilled. Valar Ventures has been inactive in this country for years. Its New Zealand website resembles digital tumbleweed. The Auckland technology incubator never eventuated. Thiel’s touted involvement with the San Francisco landing pad for Kiwi companies reportedly ended once his three-year sponsorship deal expired in 2013. The Herald could find no other charitable giving by Thiel in New Zealand since that $1m earthquake appeal donation and, given the opportunity to provide details, Thiel’s representatives did not respond.
posted by Iris Gambol at 6:57 PM on June 25, 2021 [7 favorites]
Thiel spent a mere 12 days; it's kind of stunning: "[T]he billionaire had failed to meet even 1 per cent of the typically required 1350 days of in-country residence in the five years prior to being granted citizenship." Thiel "courted" citizenship, promising investments and donations, as painstakingly laid out in How Peter Thiel Got New Zealand citizenship (The New Zealand Herald, Jan. 2017) ("A spokesperson for Thiel said the billionaire’s total investment to date in local tech firms was $50m.").
... Six months after the Santa Monica ceremony that had made [Thiel] a citizen, the mission listed on Valar Ventures’ website — which had previously billed itself as having been “founded to help grow New Zealand into a hub of technological progress” — was rewritten to remove references to the country that had just gifted him his new nationality.[...] When Thiel became involved, Xero was loitering on the start-up crossroads to success or failure and had a share price of just $1.50. The company’s stock went on to pass $40, and the company is now one of New Zealand’s largest with a market capitalisation in excess of $5b. [...] The support for Xero — from which various Valar vehicles would make hundreds of millions of dollars in capital gains as the share price surged — is the most tangible legacy of Citizen Thiel.
Re-reading Thiel’s letter today, with the benefit of hindsight, it seems other non-binding claims made during his bid for citizenship are less fulfilled. Valar Ventures has been inactive in this country for years. Its New Zealand website resembles digital tumbleweed. The Auckland technology incubator never eventuated. Thiel’s touted involvement with the San Francisco landing pad for Kiwi companies reportedly ended once his three-year sponsorship deal expired in 2013. The Herald could find no other charitable giving by Thiel in New Zealand since that $1m earthquake appeal donation and, given the opportunity to provide details, Thiel’s representatives did not respond.
posted by Iris Gambol at 6:57 PM on June 25, 2021 [7 favorites]
Matt Nippert who wrote that NZ Herald article is a most excellent reporter - closest to the tough grizzled reporter of old I've ever met
posted by mbo at 7:50 PM on June 25, 2021 [4 favorites]
posted by mbo at 7:50 PM on June 25, 2021 [4 favorites]
It's straightforward tax fraud. Evading the capital gains tax.so, wait, anyone who has a Roth with some stock in it that appreciates in value is now doing tax fraud? Even though reducing capital gains tax is the main incentive that the Roth offered to people saving for retirement?
I find it funny how when Republicans get all worked up on critical race theory, we're all "ha-ha, y'all don't know what you're talking about, stfu." but someone posts a thing about a billionaire exploiting a retirement plan that's also used by a significant portion of all American households, and by a significant number of millennials there's a lot of folks in this thread who are all, "I have no idea what this stuff does but it sounds like fraud."
This is the endemic problem where capitalism forces us to have this parasitic relationship with the stock market and operate in a rigged game where the rich have access to more opportunities to buy capital than the rest of us. Until we fix that, all of this argument about Roths being broken is just financial bike shedding. If the Roth didn't allow you to hold private equity, Thiel would've still had access to Paypal stock at $.001 and would've still been a billionaire when that company skyrocketed.
posted by bl1nk at 8:02 PM on June 25, 2021 [4 favorites]
so, wait, anyone who has a Roth with some stock in it that appreciates in value is now doing tax fraud?
I was talking about the hypothetical NFT scheme explosion described.
posted by mr_roboto at 8:06 PM on June 25, 2021
I was talking about the hypothetical NFT scheme explosion described.
posted by mr_roboto at 8:06 PM on June 25, 2021
If we take the valuation after the eBay acquisition as real ($3.8M), the remaining 1300x increase in valuation is approximately "true". There are many intermediate places where he would have had to pay taxes, reducing the cumulative gain (by a factor of 2 or 3?) but it's mostly a story of very lucky / successful tech investments. For comparison, an investor with unrealized gains also doesn't pay tax. The regular tech investor and Thiel will both die having consumed a tiny fraction of their paper wealth. Well, knowing him Thiel might commission a radioactive cloud emitting middle finger in international waters after he gets brain cancer.
Wyden's brute force policy is probably the cleanest way out: make a maximum $5M or $10M of roth withdrawals eligible for tax-free treatment.
posted by a robot made out of meat at 8:29 PM on June 25, 2021 [1 favorite]
Wyden's brute force policy is probably the cleanest way out: make a maximum $5M or $10M of roth withdrawals eligible for tax-free treatment.
posted by a robot made out of meat at 8:29 PM on June 25, 2021 [1 favorite]
yeah, sorry, it was unclear from the response whether you were referring to the NFT specifically or if the question of "who's participating in fraud" applies to anyone who takes advantage of the growth of an asset while it's sitting in a Roth.
I guess part of what I'm animated by in this thread are some folks talking about the exploit of buying private equity cheap (which I agree is a significant part of the problem) and other folks talking about how the thing to do here is to tax the entire Roth account, when setting up for tax free growth is the main reason why millenials and other early career folks are using it.
posted by bl1nk at 8:33 PM on June 25, 2021
I guess part of what I'm animated by in this thread are some folks talking about the exploit of buying private equity cheap (which I agree is a significant part of the problem) and other folks talking about how the thing to do here is to tax the entire Roth account, when setting up for tax free growth is the main reason why millenials and other early career folks are using it.
posted by bl1nk at 8:33 PM on June 25, 2021
Wyden's brute force policy is probably the cleanest way out: make a maximum $5M or $10M of roth withdrawals eligible for tax-free treatment.
Alternatively, a robust universal pension plan that guarantees a comfortable retirement for all Americans without having to bet on the stock market or creating tax loopholes for narcissist vampire venture capitalists.
posted by mr_roboto at 8:35 PM on June 25, 2021 [8 favorites]
Alternatively, a robust universal pension plan that guarantees a comfortable retirement for all Americans without having to bet on the stock market or creating tax loopholes for narcissist vampire venture capitalists.
posted by mr_roboto at 8:35 PM on June 25, 2021 [8 favorites]
The Ultrawealthy Have Hijacked Roth IRAs. The Senate Finance Chair Is Eyeing a Crackdown. (ProPublica, June 25) Sen. Ron Wyden, chair of the Senate Finance Committee, said he planned to rein in tax breaks for gargantuan Roth retirement accounts after ProPublica exposed how the superrich used them to shield their fortunes from taxes
posted by Iris Gambol at 8:54 PM on June 25, 2021 [3 favorites]
posted by Iris Gambol at 8:54 PM on June 25, 2021 [3 favorites]
Metafilter: the cheering section for a reclusive gay billionaire credibly rumored to be a vampire.
Er, that is to say, totally agree with you there, Parasite Unseen!
And I was especially pissed off about his NZ citizenship because I had to get mine by living here and doing a lot of paperwork, and how could people not see that of course he was just a rich liar who was going to drop all his so-called contributions to NZ the moment he got what he wanted? And apparently NZ is known for a lack of corruption in government? HAHAHAHA not if you're Peter Thiel!
posted by inexorably_forward at 12:16 AM on June 26, 2021
Er, that is to say, totally agree with you there, Parasite Unseen!
And I was especially pissed off about his NZ citizenship because I had to get mine by living here and doing a lot of paperwork, and how could people not see that of course he was just a rich liar who was going to drop all his so-called contributions to NZ the moment he got what he wanted? And apparently NZ is known for a lack of corruption in government? HAHAHAHA not if you're Peter Thiel!
posted by inexorably_forward at 12:16 AM on June 26, 2021
I was talking about the hypothetical NFT scheme explosion described.
My hypothetical is both clearly fraud, and yet, just as a metaphor for Thiel's evaluation of his stock.
He "purchased" something he already owned specifically to peg it at an artificially low value. At the point he purchased that stock, the company had physical assets worth $X, had expended $Y in payments to developers who presumably had generated >$Y in value to the company, and had received $Z in venture capital. Each of these could be used to establish a more accurate "fair market value" of the company and thus a portion of the company.
If ever there was a point in time where Thiel's share of the company was worth less than $2000, it was when it was still in the "sketching on a napkin" stage of development.
I currently earn about $60K per year in salary. If I took a year off of work to develop a project, one could reasonably be lead to think that I value that work as greater than $60K. As it's a private project, there isn't a "market value" yet, but there's still a point of comparison! Being able to sell >$60K worth of labor, assets, goodwill and brand recognition as less than $2K of stock TO MYSELF and then putting that into a tax-sheltered investment vehicle is clearly fraud.
Basically, there's a precarious house of cards that has created this sort of shell game for the mega-wealthy, and the only thing keeping them from paying taxes on this stuff is that they can afford to pay lawyers more than the IRS can afford to sue them.
posted by explosion at 6:40 AM on June 26, 2021 [7 favorites]
My hypothetical is both clearly fraud, and yet, just as a metaphor for Thiel's evaluation of his stock.
He "purchased" something he already owned specifically to peg it at an artificially low value. At the point he purchased that stock, the company had physical assets worth $X, had expended $Y in payments to developers who presumably had generated >$Y in value to the company, and had received $Z in venture capital. Each of these could be used to establish a more accurate "fair market value" of the company and thus a portion of the company.
If ever there was a point in time where Thiel's share of the company was worth less than $2000, it was when it was still in the "sketching on a napkin" stage of development.
I currently earn about $60K per year in salary. If I took a year off of work to develop a project, one could reasonably be lead to think that I value that work as greater than $60K. As it's a private project, there isn't a "market value" yet, but there's still a point of comparison! Being able to sell >$60K worth of labor, assets, goodwill and brand recognition as less than $2K of stock TO MYSELF and then putting that into a tax-sheltered investment vehicle is clearly fraud.
Basically, there's a precarious house of cards that has created this sort of shell game for the mega-wealthy, and the only thing keeping them from paying taxes on this stuff is that they can afford to pay lawyers more than the IRS can afford to sue them.
posted by explosion at 6:40 AM on June 26, 2021 [7 favorites]
Out of curiosity, I went and looked up Canada's equivalent of the Roth IRA, the TFSA, and found that these restrictions on what can be invested in it.:
In any case, if it were up to me (which it obviously isn't), I'd want to make a rule that the only things eligible for tax-shielded investment vehicles have to have some kind of visible fair market valuation in a sufficiently liquid market in order to avoid this kind of basis cost under-pricing shenanigans. So, basically no OTC and no private companies (and of course no real estate or art or NFTs). And, I'd probably keep the TFSA arm's length rules as well. Plus some kind of limitation on the amount you can withdraw tax-free, though I would prefer a taper rather than a hard cap (e.g.: everything below X dollars is 100% tax-free, everything above Y dollars is 0% tax-free, and everything between X and Y is somewhere between 0% and 100%).
posted by mhum at 8:23 AM on June 26, 2021 [5 favorites]
More specifically, a share of a corporation is a prohibited investment for a plan if either of the following conditions is met:They also forbid companies that are traded OTC rather than on proper exchanges but oddly (to me at least) seem to accept pretty much any private company that doesn't meet either of those two conditions above.
- the controlling individual of the plan is a specified shareholder of the corporation (generally a taxpayer who owns directly or indirectly 10% or more of any class of shares of the corporation, taking into account non-arm’s-length and certain other holdings)
- the controlling individual of the plan does not deal at arm’s length with the corporation
In any case, if it were up to me (which it obviously isn't), I'd want to make a rule that the only things eligible for tax-shielded investment vehicles have to have some kind of visible fair market valuation in a sufficiently liquid market in order to avoid this kind of basis cost under-pricing shenanigans. So, basically no OTC and no private companies (and of course no real estate or art or NFTs). And, I'd probably keep the TFSA arm's length rules as well. Plus some kind of limitation on the amount you can withdraw tax-free, though I would prefer a taper rather than a hard cap (e.g.: everything below X dollars is 100% tax-free, everything above Y dollars is 0% tax-free, and everything between X and Y is somewhere between 0% and 100%).
posted by mhum at 8:23 AM on June 26, 2021 [5 favorites]
What I'm saying here is that I came into adulthood primed to be the cheering section for a reclusive gay billionaire credibly rumored to be a vampire and Peter Thiel is so phenomenally shitty he somehow managed to fuck that up.
"Oo- an ultra-wealthy gay vampire! Is he like Lestat de Lioncourt?"
"No, more like Roy Cohn."
posted by TheWhiteSkull at 9:31 AM on June 26, 2021 [7 favorites]
"Oo- an ultra-wealthy gay vampire! Is he like Lestat de Lioncourt?"
"No, more like Roy Cohn."
posted by TheWhiteSkull at 9:31 AM on June 26, 2021 [7 favorites]
mhum, that’s a good proposal. FDIC insured no-risk non-market things like savings accounts or CDs might be good to add too. I’m not sure if there’s a term or concept that covers both them and the fair/easily market valued things in your list.
posted by brendano at 10:09 AM on June 26, 2021
posted by brendano at 10:09 AM on June 26, 2021
Personally, I think the Roth mechanism (tax now no tax later) is just really vulnerable to this kind of unlimited upside. Buy your literal and figurative lottery tickets with it. With a current year benefit like a traditional IRA it’s easier to prevent these kinds of games and to limit it to actually middle class individuals.
There are good reasons to encourage individual savings rather than rely solely on taxes for retirement. As a former Illinois citizen, I’m skeptical of the public providing effective oversight. As a millennial I’ve also watched large government transfers to current retirees and the wealthy with little thought to sustainability.
posted by a robot made out of meat at 11:28 AM on June 26, 2021
There are good reasons to encourage individual savings rather than rely solely on taxes for retirement. As a former Illinois citizen, I’m skeptical of the public providing effective oversight. As a millennial I’ve also watched large government transfers to current retirees and the wealthy with little thought to sustainability.
posted by a robot made out of meat at 11:28 AM on June 26, 2021
The tax code is designed by the very wealthy, it serves the very wealthy. The wealth transfer from the bottom and middle to the top that roughly started in 1980 is something we'll be studying for years to come, it's perhaps the largest wealth transfer in history from so many to so few. Wonderful way to run a society and a democracy.
posted by chaz at 1:36 PM on June 26, 2021 [2 favorites]
posted by chaz at 1:36 PM on June 26, 2021 [2 favorites]
If someone had invested $5000 in AAPL on 12/30/1999 through a Roth IRA, you would now be sitting on $1,083,000 (28.45%). And I would shake the hand of any person prescient enough to do just that.
Thiel’s blatant self-dealing, on the other hand, should be illegal. Of course, considering this information is virtually identical to what was reported about Mitt Romney back in 2012, it isn’t just legal but seen as virtuous in some quarters.
posted by Big Al 8000 at 2:54 PM on June 26, 2021 [2 favorites]
Thiel’s blatant self-dealing, on the other hand, should be illegal. Of course, considering this information is virtually identical to what was reported about Mitt Romney back in 2012, it isn’t just legal but seen as virtuous in some quarters.
posted by Big Al 8000 at 2:54 PM on June 26, 2021 [2 favorites]
If I was one of PayPal‘a initial investors, I’d be suing Thiel for fraud. I can guarantee he didn’t sell them shares at those prices.
posted by Big Al 8000 at 2:57 PM on June 26, 2021
posted by Big Al 8000 at 2:57 PM on June 26, 2021
I answered a question wrongly in about 2005 or 2006 after a market crash. My Dad's stocks dropped down to about 20K from 100K. Half of which would be my paternal inheritance. He asked me if I knew much about Google, and should he invest the money there. I said no and therefore no. It might have been a little earlier. I had just done his final profit and loss statement. This is tangental to the conversation but Thiel runs one of the largest espionage platforms in the world, with Uber. You are the product he really sells, when you ride in his network of vehicles. And the drivers are real gossips as well.They have a lot to say about everyone who rides, especially politicos, the well connected, anyone in fact. They have everything.
posted by Oyéah at 7:33 PM on June 26, 2021
posted by Oyéah at 7:33 PM on June 26, 2021
If I was one of PayPal‘a initial investors, I’d be suing Thiel for fraud. I can guarantee he didn’t sell them shares at those prices.
I’m sure that the founder’s price was fully disclosed to all early investors and that, further, they were completely familiar with the arrangement, which is standard. Discounted shares are seen as a form of compensation to the founders of a startup, who are spending their time on a venture that will most likely crash and burn. Other early investors will also have a low (but not as low) price backed into their shares, and there are various financial tools and contracts that determine how much control these early investors might have and to what extent equity might be balanced with debt.
If you’re investing in a startup, you had better know all this. It’s a high-risk investment.
posted by mr_roboto at 8:24 PM on June 26, 2021
I’m sure that the founder’s price was fully disclosed to all early investors and that, further, they were completely familiar with the arrangement, which is standard. Discounted shares are seen as a form of compensation to the founders of a startup, who are spending their time on a venture that will most likely crash and burn. Other early investors will also have a low (but not as low) price backed into their shares, and there are various financial tools and contracts that determine how much control these early investors might have and to what extent equity might be balanced with debt.
If you’re investing in a startup, you had better know all this. It’s a high-risk investment.
posted by mr_roboto at 8:24 PM on June 26, 2021
I have been a founder at a startup, and received 1% of the company at $0.01/share. At that point the company had no monetary value, it was just a bunch of people with an idea, prior to VC funding.
But essential what was happening there was that I was selling my portion of the idea, plus a promise to work for them for a period (because the options vested over time), to the newly formed company in exchange for stock options (the actual money is insignificant here, the stock has to be valued at something, doesn't really matter whether it's 0.01 or 0.001 it's near 0, just can't be 0 for a bunch of reasons, it's the IP that's the important thing that's being transfered).
What Thiel has done here is to mix his Roth with his own business, he sold his idea (and promise to work) to Paypal the company and his Roth got the shares (and eventually the actual money when the shares became valuable) - eventually he'll get all the money he got from Paypal (and what he's made investing it) tax free when he turns 59.5
(and what little money I made joining the startup above was eventually taxed at my marginal rate)
posted by mbo at 8:58 PM on June 26, 2021
But essential what was happening there was that I was selling my portion of the idea, plus a promise to work for them for a period (because the options vested over time), to the newly formed company in exchange for stock options (the actual money is insignificant here, the stock has to be valued at something, doesn't really matter whether it's 0.01 or 0.001 it's near 0, just can't be 0 for a bunch of reasons, it's the IP that's the important thing that's being transfered).
What Thiel has done here is to mix his Roth with his own business, he sold his idea (and promise to work) to Paypal the company and his Roth got the shares (and eventually the actual money when the shares became valuable) - eventually he'll get all the money he got from Paypal (and what he's made investing it) tax free when he turns 59.5
(and what little money I made joining the startup above was eventually taxed at my marginal rate)
posted by mbo at 8:58 PM on June 26, 2021
I should add - if you get founders stock at $0.01 (or 0.001) there's a transaction you do - you buy it immediately - it's a risk, you might lose it all (my 1% cost $1000), but has a giant upside, you don't yet own the stock because it's going to vest over time - but you buy it because (in the US) it starts the clock on long term capital gains tax treatment (ie 25% rather than your top marginal rate).
I kind of wonder how it works legally - who owned Thiel's Paypal stock before it was bought by his Roth? (the above transaction) - I kind of assume it was likely in his name not in the name of his Roth - and when it vested who did it vest to?
posted by mbo at 9:05 PM on June 26, 2021
I kind of wonder how it works legally - who owned Thiel's Paypal stock before it was bought by his Roth? (the above transaction) - I kind of assume it was likely in his name not in the name of his Roth - and when it vested who did it vest to?
posted by mbo at 9:05 PM on June 26, 2021
I paid a penalty last year because I accidentally put too much money (regular money, not fairy shares) into my ROTH. I just set up an auto-pay and miscalculated some other things and had to pay up. What a sucker I am. ETA: the penalty was small, because the amounts are within the rules of the ROTH. I’m not one of those folks who are smartly apparently using their Roths for stock purchases like duh.
posted by amanda at 5:49 AM on June 27, 2021 [1 favorite]
posted by amanda at 5:49 AM on June 27, 2021 [1 favorite]
so, wait, anyone who has a Roth with some stock in it that appreciates in value is now doing tax fraud?
Thiel didn't put stock in his Roth, he put options, which is a ridiculous thing to allow into something like a Roth IRA.
posted by rhizome at 10:42 AM on June 27, 2021
Thiel didn't put stock in his Roth, he put options, which is a ridiculous thing to allow into something like a Roth IRA.
posted by rhizome at 10:42 AM on June 27, 2021
Thiel didn't put stock in his Roth, he put options
I don’t think so. I think he used the IRA to buy discounted shares directly.
I know you can trade options in an IRA. I can’t figure out if there’s a way to have compensatory options delivered directly to an IRA. I think you might have to trade your options to your own IRA and the sale would be taxable? The tax implications of exercising an option inside an IRA are totally opaque to me.
posted by mr_roboto at 4:02 PM on June 27, 2021
I don’t think so. I think he used the IRA to buy discounted shares directly.
I know you can trade options in an IRA. I can’t figure out if there’s a way to have compensatory options delivered directly to an IRA. I think you might have to trade your options to your own IRA and the sale would be taxable? The tax implications of exercising an option inside an IRA are totally opaque to me.
posted by mr_roboto at 4:02 PM on June 27, 2021
- I kind of wonder how it works legally - who owned Thiel's Paypal stock before it was bought by his Roth? (the above transaction) - I kind of assume it was likely in his name not in the name of his Roth - and when it vested who did it vest to?
- so, wait, anyone who has a Roth with some stock in it that appreciates in value is now doing tax fraud?
-- Thiel didn't put stock in his Roth, he put options, which is a ridiculous thing to allow into something like a Roth IRA.
--- I don’t think so. I think he used the IRA to buy discounted shares directly.
These questions (and more!) are answered in the [long] ProPublica piece. Excerpts from this [shorter] Marketwatch gloss, "Peter Thiel turned his Roth IRA into a pot of gold. You can too, but tread carefully," from earlier today (bolding mine):
ProPublica said Thiel, PayPal’s co-founder, used his Roth IRA to buy 1.7 million shares of the company in 1999. He bought the shares at $0.001, three years before the company went public, and as the company grew in value, so did Thiel’s tax advantaged account. Roth IRAs are funded with after-tax money, so the earnings come out tax-free versus a traditional IRA, which incur taxes upon withdrawal. [...] Traditional and Roth IRA contribution limits are currently $6,000, so it might seem mind-boggling to amass that much wealth in an account, but bear in mind the so-called “self-directed IRA.”
[Malcolm Ethridge, executive vice president at CIC Wealth in Rockville, Md., and host of The Tech Money podcast] said the term “self-directed” can be confusing because in IRAs and Roth IRAs, account holders can already tell the custodian, like Fidelity Investments or Charles Schwab, what securities to buy and sell. But self-directed IRAs and self-directed IRA custodians enable the account holder to invest in a far wider array of assets in a traditional IRA or Roth IRA, Ethridge said. That can include real estate, privately held companies, commodities, precious metals and more, he said. Stocks and bonds in the public market have analysts and regulators watching every day to gauge value and monitor compliance. Figuring out value can be a much tougher task for an investment opportunity like a start-up.
“If you don’t know what you are doing, therein lies the risk,” said Matt Chancey of Dempsey Lord Smith. It’s a matter of know-how, Chancey said, but when pouring money into private markets, also a matter of who you know — who could, for example, share insight on a new company ready to pop in value. “You have to have access to deals like that be able to execute,” he added.
posted by Iris Gambol at 4:48 PM on June 27, 2021
- so, wait, anyone who has a Roth with some stock in it that appreciates in value is now doing tax fraud?
-- Thiel didn't put stock in his Roth, he put options, which is a ridiculous thing to allow into something like a Roth IRA.
--- I don’t think so. I think he used the IRA to buy discounted shares directly.
These questions (and more!) are answered in the [long] ProPublica piece. Excerpts from this [shorter] Marketwatch gloss, "Peter Thiel turned his Roth IRA into a pot of gold. You can too, but tread carefully," from earlier today (bolding mine):
ProPublica said Thiel, PayPal’s co-founder, used his Roth IRA to buy 1.7 million shares of the company in 1999. He bought the shares at $0.001, three years before the company went public, and as the company grew in value, so did Thiel’s tax advantaged account. Roth IRAs are funded with after-tax money, so the earnings come out tax-free versus a traditional IRA, which incur taxes upon withdrawal. [...] Traditional and Roth IRA contribution limits are currently $6,000, so it might seem mind-boggling to amass that much wealth in an account, but bear in mind the so-called “self-directed IRA.”
[Malcolm Ethridge, executive vice president at CIC Wealth in Rockville, Md., and host of The Tech Money podcast] said the term “self-directed” can be confusing because in IRAs and Roth IRAs, account holders can already tell the custodian, like Fidelity Investments or Charles Schwab, what securities to buy and sell. But self-directed IRAs and self-directed IRA custodians enable the account holder to invest in a far wider array of assets in a traditional IRA or Roth IRA, Ethridge said. That can include real estate, privately held companies, commodities, precious metals and more, he said. Stocks and bonds in the public market have analysts and regulators watching every day to gauge value and monitor compliance. Figuring out value can be a much tougher task for an investment opportunity like a start-up.
“If you don’t know what you are doing, therein lies the risk,” said Matt Chancey of Dempsey Lord Smith. It’s a matter of know-how, Chancey said, but when pouring money into private markets, also a matter of who you know — who could, for example, share insight on a new company ready to pop in value. “You have to have access to deals like that be able to execute,” he added.
posted by Iris Gambol at 4:48 PM on June 27, 2021
Frankly, the Roth is a bad solution to the problem of retirement saving, and the fact that the system has been so broken that it is the best option available to a large number of middle class millennials is not a defense. Theil's manipulations take it to an extreme, but it's bad for everyone. Capital gains tax is not and has never been the problem with saving for retirement. (See: stagnating wages, collapsing pensions, underfunded social security.) Tying the middle class to a vehicle which both deprives the government of capital gains tax revenues and builds the public perception that capital gains taxes are something it's normal to avoid is part of the long term strategy to reshape the financial landscape into one that primarily serves the rich.
posted by Nothing at 4:15 AM on June 28, 2021 [5 favorites]
posted by Nothing at 4:15 AM on June 28, 2021 [5 favorites]
I think the Roth itself is fine. I do agree that it needs some regulations to prevent abuse. Some posters above mentioned limiting the amount of tax-free gains, which is reasonable, a good start.
What I'd really like to see is protective regulations, like disallowing the "self-directed IRA". It worked out for Thiel here; we've covered that. But the real danger is in allowing people to fall for fraud and scams under that umbrella, especially by shysters who will advertise tax-free gains. I'd bet a lot more people want to be Thiel, and lose big trying, that don't get ProPublica to write about their losses. That's how it works.
In the bigger picture, retirement funding has gone from company-held, federally guaranteed pensions to 401/403-type accounts and IRAs. At the same time, proposals come up every now & then to privatize Social Security. I see most of these motions as opening a door for the rich and savvy (read: the credit-default swappers) to earn rents, and get a hold of the savings and earnings of the rest of us regular Joes. The GOP would like nothing more than to get a hold of the Social Security trust. Some "real estate developer" would really love you invest (tax-free) in their new plans, with your retirement funds. There's always "assets under management" rent-seekers.
If we really want to ensure the safe retirement of our population -- limit investment options to Lifecycle or index funds. That way the general population gains what the stock market does! And people looking for more leverage than that need to do it outside of the security of retirement accounts.
posted by Dashy at 7:34 AM on June 28, 2021
What I'd really like to see is protective regulations, like disallowing the "self-directed IRA". It worked out for Thiel here; we've covered that. But the real danger is in allowing people to fall for fraud and scams under that umbrella, especially by shysters who will advertise tax-free gains. I'd bet a lot more people want to be Thiel, and lose big trying, that don't get ProPublica to write about their losses. That's how it works.
In the bigger picture, retirement funding has gone from company-held, federally guaranteed pensions to 401/403-type accounts and IRAs. At the same time, proposals come up every now & then to privatize Social Security. I see most of these motions as opening a door for the rich and savvy (read: the credit-default swappers) to earn rents, and get a hold of the savings and earnings of the rest of us regular Joes. The GOP would like nothing more than to get a hold of the Social Security trust. Some "real estate developer" would really love you invest (tax-free) in their new plans, with your retirement funds. There's always "assets under management" rent-seekers.
If we really want to ensure the safe retirement of our population -- limit investment options to Lifecycle or index funds. That way the general population gains what the stock market does! And people looking for more leverage than that need to do it outside of the security of retirement accounts.
posted by Dashy at 7:34 AM on June 28, 2021
A simple law change saying that the amount you can take out without tax cannot be more that the increases of the Dow/NASDAQ pl,us say 20% over that period, the rest must be taxed as capital gains (so 25%+) would allow Roths to do as they were originally intended without this sort of abuse
No a simple cap on the total value - say $10m. That's huge, that's approximately top 2% in the US, just in a single account. Any appreciation above that is taxed at normal income rates.
posted by The_Vegetables at 9:10 AM on June 28, 2021 [4 favorites]
No a simple cap on the total value - say $10m. That's huge, that's approximately top 2% in the US, just in a single account. Any appreciation above that is taxed at normal income rates.
posted by The_Vegetables at 9:10 AM on June 28, 2021 [4 favorites]
Why You Can’t Turn Your Roth IRA Into a Billion-Dollar Tax Shelter (ProPublica, July 1, 2021), snippets: Ultrawealthy Americans have used different means to build Roths worth tens or hundreds of millions of dollars. How are they able to do it while you can’t? Check out our explainer of one way the Roth works for the ultrawealthy and not for you.
[ProPublica isn't always best pleased with mainstream media's chosen emphases for its investigations.]
posted by Iris Gambol at 2:44 PM on July 1, 2021
[ProPublica isn't always best pleased with mainstream media's chosen emphases for its investigations.]
posted by Iris Gambol at 2:44 PM on July 1, 2021
I think that disallowing the inputs, like options and every other volatile, uh..."asset" used to reach these results. Basically a speed limit.
posted by rhizome at 1:53 PM on July 2, 2021
posted by rhizome at 1:53 PM on July 2, 2021
« Older The world's greatest record store might be in... | We reaffirm our call for Warren Ellis to earn the... Newer »
This thread has been archived and is closed to new comments
posted by RakDaddy at 12:02 PM on June 25, 2021 [6 favorites]