Tax Issues With Secondaries

There are tax issues associated with a secondary sale.

Here’s a list of issues to consider:

Gains on secondary sales are taxed based on the holding time of the shares.

If less than one year, then ordinary income tax rates apply.  If longer than one year then the capital gains tax rate applies.

If the purchase is made at a premium price, then additional tax issues arise.

If made to an employee then the IRS may treat a portion of the gains as compensation and not as capital gains.

If made to a third party investor the IRS may also determine a portion of the sale to be compensation and require the company to apply withholding.

The identity of the buyer, the type of sale, and the purpose determine the tax treatment where premium pricing is used.

Stock purchases only from employees will be deemed as compensation.

If the purpose of the sale is for reducing dilution, gaining control, or addressing a company in need then those sales will not be deemed as compensation.

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