Check my Fed Tax Math Please

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Topic Author
arsenalfan
Posts: 1132
Joined: Sun Dec 08, 2013 11:26 pm

Check my Fed Tax Math Please

Post by arsenalfan »

Seeking Fed tax help on an investment that, two years later, is returning roughly 100% cash and 200% common stock equity.
2018 tax bracket = 37%

Using simplified numbers:
Inital Investment=$100k
Return
$200k cash = I am taxed 20% on my $100k profit, since 20% LTCG right (has been 2 years)? So after taxes that is $180k
$200k common stock = if sell immediately, am I taxed 37% on this since short term gains, so $126k net? Versus hold for a year and (assuming stays at $200k) then $160k net since 20% LTCG?

Thanks in advance. No interest in holding stock for a year, just wrapping head around tax implications.
Please omit state taxes/etc.
rkhusky
Posts: 17764
Joined: Thu Aug 18, 2011 8:09 pm

Re: Check my Fed Tax Math Please

Post by rkhusky »

Wouldn't you have a $300K long term gain? Then if you sold the stock quickly, wouldn't the gain from that sale be rather small? Or am I misunderstanding and you still have your initial investment and it somehow produced gains of cash and stock?
Topic Author
arsenalfan
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Joined: Sun Dec 08, 2013 11:26 pm

Re: Check my Fed Tax Math Please

Post by arsenalfan »

Invested $100k into a privately held company.

Post buyout by a publicly held company, given $200k cash and $200k stock in publicly held company.

How do you think taxes will work?

I was assuming the $100k cash gain was LTCG, and the $200k in newly issued stock, if sold immediately, would be STCG.

Would be great if all $300k was LTCG!
ExitStageLeft
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Re: Check my Fed Tax Math Please

Post by ExitStageLeft »

No expertise whatsoever, but it seems to be me the basis for the $200K in cash would be $50K and the basis for the $200K in stock would be $50K. Proportion the basis for each according to the value of the payout. That seems like a reasonable way to do it, so I must be wrong. :mrgreen:
rkhusky
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Re: Check my Fed Tax Math Please

Post by rkhusky »

No expertise either. It seems like you invested $100K into something. Someone bought it from you for $200K cash and something worth $200K, giving you a $300K profit. If you sold the something for $200K, there would be no gain.
Ace1
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Location: Twinsburg Ohio

Re: Check my Fed Tax Math Please

Post by Ace1 »

Arsenal
I believe your situation is covered in pub 550 chapter 4, probably page 48 ... Corporate stocks.
I believe you have a partly taxable, partly non taxable exchange.
The new stock assumes the basis of your old stock (100k), and the cash received is taxable.
https://www.irs.gov/pub/irs-pdf/p550.pdf#page47.
“Money or other property received. If in an otherwise nontaxable trade you receive money or other property in addition to stock, then your gain on the trade, if any, is taxed, but only up to the amount of the money or other property. Any loss is not recognized.”
So you have a gain of the cash 200k, and stock with a basis of 100k.
Ace
libralibra
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Re: Check my Fed Tax Math Please

Post by libralibra »

post removed
Last edited by libralibra on Sun May 26, 2019 9:50 pm, edited 1 time in total.
Topic Author
arsenalfan
Posts: 1132
Joined: Sun Dec 08, 2013 11:26 pm

Re: Check my Fed Tax Math Please

Post by arsenalfan »

Thanks everyone for their advice.

libralibra and ace1 make the most sense to me - though they say 2 different things.

As I use TurboTax, I may just liquidate the stock at my brokerage and see what tax form is generated; I also know the firm will be generating tax paperwork for the cash payout, so I'll see what happens there.

Have a bunch of warrants - will be interesting to see if they will be worth exercising. This is an interesting dip into the private equity world, and the tax implications.
cas
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Re: Check my Fed Tax Math Please

Post by cas »

arsenalfan wrote: Thu Mar 15, 2018 12:51 pm
Return
$200k cash = I am taxed 20% on my $100k profit, since 20% LTCG right (has been 2 years)? So after taxes that is $180k
$200k common stock = if sell immediately, am I taxed 37% on this since short term gains, so $126k net? Versus hold for a year and (assuming stays at $200k) then $160k net since 20% LTCG?
If the 37% tax bracket that you mention is due to your ordinary income (i.e. stuff other than this transaction), you will also owe an additional 3.8% Net Investment Income Tax (NIIT) on any taxable investment gains.

As libralibra said, when this type of transaction happens with a publicly traded company, the company issues a document explaining how how the cash/new stock should be reported on taxes, how to allocate the existing cost basis, and whether there are any changes in holding period or cost basis. I don't know whether a privately held company has requirements (or at least inclination) to issue a similar document.
Topic Author
arsenalfan
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Joined: Sun Dec 08, 2013 11:26 pm

Re: Check my Fed Tax Math Please

Post by arsenalfan »

cas
Thanks, that makes sense.
rkhusky
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Re: Check my Fed Tax Math Please

Post by rkhusky »

Ace1 wrote: Thu Mar 15, 2018 10:47 pm Arsenal
I believe your situation is covered in pub 550 chapter 4, probably page 48 ... Corporate stocks.
I believe you have a partly taxable, partly non taxable exchange.
The new stock assumes the basis of your old stock (100k), and the cash received is taxable.
https://www.irs.gov/pub/irs-pdf/p550.pdf#page47.
“Money or other property received. If in an otherwise nontaxable trade you receive money or other property in addition to stock, then your gain on the trade, if any, is taxed, but only up to the amount of the money or other property. Any loss is not recognized.”
So you have a gain of the cash 200k, and stock with a basis of 100k.
Ace
This example on pg 48 seems relevant:
Example 1. On April 14, 2016, KP1 Corporation was acquired by KP2 Corporation. You held 100 shares of KP1 stock with a basis of $3,500. As a result of the acquisition, you received 70 shares of KP2 stock in exchange for your KP1 stock. You do not recognize gain or loss on the transaction. Your basis in the 70 shares of the new stock is still $3,500.
So, with the pro rata rule, you would have a LT cap gain of $150K and $50K basis in the stock. If you sell the latter for $200K, you have a $150K cap gain, but not sure whether short or long, since I don't see anything about whether the holding period transfers along with the basis (libralibra indicates above that it does, which would give you a $300K LT cap gain if you sold, which makes most sense to me).

Here is more support for the transfer of holding period:
https://www.fool.com/taxes/how-to-calcu ... eriod.aspx
Stock splits and spinoffs: If you receive a stock dividend, your holding period for the "new" shares is the same as for the "old" shares. This is also true if you receive new stock in a company that has been spun off from the original company that you purchased.

For example, Jack purchased 100 shares of stock in April 2006. In June 2007, the company declared a 100% stock dividend, also known as a 2-for-1 stock split. Jack now has 200 shares of the company stock, but they all have the same holding period -- starting with the date of original purchase back in April 2006.

Here's another example. Using the same facts as above, let's assume that instead of declaring a stock dividend, the company spun off a subsidiary. Jack receives an additional 30 shares of the new company in January 2008. Even though these are brand-new shares in a brand-new company, they will have the same holding period as the original shares that were purchased back in April 2006.
Last edited by rkhusky on Fri Mar 16, 2018 10:46 am, edited 5 times in total.
dbr
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Re: Check my Fed Tax Math Please

Post by dbr »

I think you should take a coherent document set of all your information to a tax CPA and get it figured out. It is too easy for the exact situation not to be understood on an Internet forum and I would also not be so sure you would enter the right things in TurboTax.
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