Fri, 22 April 2022
Gains and Losses
Hello, this is Hall T. Martin with the Startup Funding Espresso -- your daily shot of startup funding and investing.
There’s an old saying, it’s not how much you make, it’s how much you keep that counts.
Tax management is an important topic for angel investors.
There are specific laws that give tax breaks to investors for startup investments.
The first is called Section 1244 which gives the investor the ability to take ordinary income deductions on losses rather than capital gains deductions.
Since many startup investments result in a loss, Section 1244 helps offset those losses.
For successful exits, Section 1202 reduces or eliminates taxes on gains from an exit.
For stock acquired after 9/28/2010, there is a 100% exclusion on the gains for tax purposes.
Before that date, there is a 50%-75% exclusion depending on the date.
You must hold the stock for 5 years.
Then there is the 1045 rollover which lets the investor rollover proceeds from the sale of stock from one startup to a new one without paying capital gains on the first one.
You must do so within 60 days.
If you have restricted stock, then 83(b) election lets you pay the taxes when the options vest, rather than when you exercise them.
This lets you pay taxes when the value is lower and exercise the options later when the value is higher.
These rules have been in place for a while now, so it’s important to check with your accountant about any changes.
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