|
Posted by matt_e10 on February 25, 2007, 12:40 am
Please log in for more thread options
I am a co-founder of a privately held start-up LLC. Because
of this I was given about 10% of the available shares in the
company at a base price of $0.20 per share. I will pay taxes
on this this year.
A friend of mine is co-founder of a non-related LLC. They
are currently raising capital at $10.00 per share. We are
considering trading each other a portion of our shares to
each other as a way to hedge our bets. However he has asked
me to guesstimate the future value of my shares in order to
calculate the number we will trade. For example if I were to
guess the future value of my shares would be $10.00 then we
would trade today at a rate of 1 share for 1 share.
Is there any taxable event going on here? My accountant said
there is not until shares are sold or dividends are
collected but just wondered what people on here thought. Has
anyone ever heard of trading on future value?
<< ======================================================= >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
<< are at www.asktax.org. >>
<< Copyright (2006) - All rights reserved. >>
<< ======================================================= >>
|
|
Posted by shedges on February 26, 2007, 1:13 am
Please log in for more thread options
Well, I disagree. Although your accountant probably looks at
this deal as a "like-kind exchange", IRC Sec 1031(a)(2) and
Reg 1.1031(a)-1 specifically excludes "security interests"
and "partnership interests" from the like-kind rules. LLC
ownership interests are securites and are usually
partnerships.
BACKGROUND: In general the like-kind exchange rules defers
recognition of income until the after-acquired property is
disposed of. There are some exceptions, which allow the
like-kind treatment to securities and partnerships, but you
have not mentioned anything to lead me to believe you are
within any exception. Here are some examples of these
exceptions which recast some limited security and
partnership transaction as a deferred 1031 exchange ...
transfer in the event of divorce, ESOP trades, conflict of
interest exchanges, and a few other rare instances you have
not mentioned. If you fell under the like-kind exchange
rules (which you don't) gain would not be recognized or
taxed until the newly acquired property is later sold or
exchanged in a taxable event.
Assuming you are not eligible for the like-kind exchange
deferral treatment under Sec 1031, a sale or exchange, such
as this, is a taxable event. Your gain is computed by
deducting your BASIS (usually your COST of the item or items
given up) from the AMOUNT REALIZED (usually the Cash, plus
Fair Market Value (FMV) of items and the FMV of the services
you'll receive in the transaction).
In plain english, you have to figure what your "cost basis"
is in the LLC interest you are giving up. This cost basis is
usually your out-of-pocket cash paid for the interest you're
giving up. This may be ZERO, if you got it in exchange for
services. It is almost always the cash paid for that portion
of the ownership interest being exchanged.
Next figure the FMV of the item(s) being received. This is
determined by what a willing buyer would pay to receive the
item, with neither the buyer nor seller under any compulsion
to buy or sell. Good luck with this one. Ask him what it's
worth. It might just be the net worth of the company,
divided by the number of Issued LLC Ownership Units, unless
there is goodwill involved in an operating company with a
business track record. In that case it may be a guess, or an
appraisal, or it may be what he thinks is the value of your
LLC Certificates (plus your cash and services given up).
Also, your LLC Certificate's future value may be the Amount
Realized. This makes sense, since most business transactions
are done at arm's lenght for equal and just consideration.
So, if your Basis is $1 and the value of the Amount Received
is $10, your gain is $9. This is a short term capital gain
if your LLC Certificates were held less than one year. It is
Long Term Cap Gain if held more than a year. The time starts
counting the day after you receive ownership of your
interest ... that is day 1. Long term gains are taxed at a
lower rate.
In your example, the base price of $0.20 of your interest is
irrelevant unless that is what you paid. Your cost is
usually your basis. Additionally, his asking price for
raising capital is irrelevant, unless it represents its FMV
... which it may. So, if you paid $0.20 per unit and the FMV
of each of his units is $10, upon exchange, you have a gain
of $9.80, short or long term, depending. This also means the
FMV of your units is $10 even though your basis is only
$0.20. Got it? Basis and FMV are usually never the same in
the real world.
If you give him $5 cash plus your $0.20 basis in your
Ownership Interest, your basis is $5.20 and your gain is
$4.80 if his FMV is $10.
If he gives you $3 cash plus his $10 FMV in his Ownership
Interest for your $0.20 basis Ownership Interest, your gain
is $12.80.
<< ======================================================= >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
<< are at www.asktax.org. >>
<< Copyright (2006) - All rights reserved. >>
<< ======================================================= >>
|
|
Posted by Seth Breidbart on February 27, 2007, 4:14 pm
Please log in for more thread options > In plain english, you have to figure what your "cost basis"
> is in the LLC interest you are giving up. This cost basis is
> usually your out-of-pocket cash paid for the interest you're
> giving up. This may be ZERO, if you got it in exchange for
> services. It is almost always the cash paid for that portion
> of the ownership interest being exchanged.
But if you got the stock in exchange for work, and paid
income tax on it (or on the discounts), your basis is the
amount you paid plus the amount you paid income tax on.
Seth
<< ======================================================= >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
<< are at www.asktax.org. >>
<< Copyright (2006) - All rights reserved. >>
<< ======================================================= >>
|
|
Posted by Seth Breidbart on February 26, 2007, 1:13 am
Please log in for more thread options
> I am a co-founder of a privately held start-up LLC. Because
> of this I was given about 10% of the available shares in the
> company at a base price of $0.20 per share.
>
> A friend of mine is co-founder of a non-related LLC. They
> are currently raising capital at $10.00 per share. We are
> considering trading each other a portion of our shares to
> each other as a way to hedge our bets.
That's a taxable event, in effect you're selling your shares
and buying his (and vice versa).
> However he has asked
> me to guesstimate the future value of my shares in order to
> calculate the number we will trade. For example if I were to
> guess the future value of my shares would be $10.00 then we
> would trade today at a rate of 1 share for 1 share.
>
> Is there any taxable event going on here?
Guessing isn't a taxable event.
> My accountant said
> there is not until shares are sold or dividends are
> collected but just wondered what people on here thought.
Trading is selling.
There's a trick that might work to avoid that. Set up an
investment partnership; each of you puts $20,000 worth of
shares (at whatever value the two of you agree on) and owns
50% of the partnership. Contributing shares to a partnership
in return for its shares is not a taxable event.
At some time in the future, the partnership dissolves,
selling the shares and giving each of you half. That's
taxable, of course. (It might also be possible for it to
dissolve without selling and give each of you half of each
company's shares; I don't know if that would be taxable or
not.)
Seth
<< ======================================================= >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
<< are at www.asktax.org. >>
<< Copyright (2006) - All rights reserved. >>
<< ======================================================= >>
|
| Similar Threads | Posted | | Day trading and Schedule D | August 5, 2008, 5:59 pm |
| Forex trading questions | October 24, 2007, 5:46 pm |
| Trading profits into a tax-deferred account | November 23, 2006, 2:12 am |
| book advice for day trading/taxes | June 5, 2007, 3:19 pm |
| Taxes on stock trading gains | November 11, 2008, 2:57 pm |
| Wash Sale question (sort of) between IRA and non-IRA accounts (Advanced trading) | May 1, 2007, 7:12 pm |
| fractional shares | April 19, 2008, 3:11 pm |
| IRA distribution in shares of stock. | November 4, 2006, 10:35 pm |
| LLC and "selling shares" tax information | January 19, 2007, 8:25 pm |
| sale of treasury shares | February 13, 2008, 11:28 am |
|
|
Yahoo! 
Google 
Windows Live 
del.icio.us 
digg 
Netscape 
XML Sitemap