How are IPO windfalls taxed for non-employee early-round investors?

D

daedalus

Well-known member
A family member was invited by his former boss to invest in a start-up a long time ago, and now that company is working to go public. It sounds like this person needs to provide brokerage account info to the start-up, and the shares will appear in the account prior to the start of trading. Family member is considering cashing out. I'm picking up bits and pieces of info on the internet regarding valuations, but this could be a pretty good windfall for him, as he was a very early round (maybe 1st) investor. Assuming there are no lock outs or other restrictions, if they were to sell their shares when trading starts, how would the profits be taxed? Is this a long-term capital gain? Regular income? Any strategies in this situation to minimize taxes? This person is retired and on SS.
 
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If you wanna fully hedge it and sell it on the day it goes public try shorting it against the box, I don’t know if they’ve outlawed this yet, but I used to do it all the time in the 90s. Locks in your sale price and lets you hold it fully hedged until you want to realize it. Consult your tax man to be sure though.🤷🏽‍♂️
 
I like it, and it's creative, but this person certainly wouldn't have the margin to do that. Basically zero experience in the markets other than mutual funds, would probably not even be approved for a margin account.
 
there’s a million put/call strategies that you could use, but if he’s not very sophisticated, it can get tricky. 🤷🏽‍♂️
 
This would be a long term capital gain. So the sales price minus his cost basis would be the taxable income. This assumes it was a basic investment in actual shares vs investment in some sort of partnership which then invested in the company. If it was PE backed the initial investment may not have been a simple/traditional investment (cash for stock)
 
If it is substantial he may be able to utilize a complex trust…

Eliminating Capital Gains Tax Using A Complex Trust

One way to eliminate capital gains is through the use of a complex trust. Trust accounting is different than the more commonly used generally accepted accounting principles, and the distributable net income is calculated in a different manner when using a complex trust. When trust documents are implemented properly, you can effectively transfer control of assets from one person to another without triggering a taxable event.

https://www.forbes.com/sites/forbes...ns-tax-using-a-complex-trust/?sh=755f534c27fe
 
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