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The Guy Behind the Tree
The Guy Behind the Tree, Experienced Investor & Financier
Category: Tax
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what is the capital gains cost basis for a recurring ...

Resolved Question:

what is the capital gains cost basis for a recurring revenue stream like an insurance commission?
Submitted: 8 years ago.
Category: Tax
Expert:  The Guy Behind the Tree replied 8 years ago.
A logical question.

But a recurring revenue stream, like an insurance commission, is not a capital gain. It is earned income - regular income taxed at regular income tax rates.

Capital gains tax treatment only applies to the purchase and subsequent sale of an asset.
Customer: replied 8 years ago.
Reply to The Guy Behind the Tree's Post: no, what I meant is

when I sell that revenue stream
Expert:  The Guy Behind the Tree replied 8 years ago.
I see.

The sale of your revenue stream will convert future income into current income. The funds you receive will still be current income, taxed at regular income tax rates. Instead of receiving income each year (and paying regular income tax each year) you will receive one lump sum now of regular income, and be taxed at regular income tax rates.

I face a similar situation with commissions myself.
Customer: replied 8 years ago.
Reply to The Guy Behind the Tree's Post: Sorry, I'm being unclear. I have an insurance business. It's worth $25,000 a month in current revenue. I want to sell this to a company for $500,000 in a one time payment.

They don't have the cash for this, so they will pay me in installments over ten years.

1) What's my cost basis, I've been in business for 16 years.
2) On that $500,000 over ten years, is it 33% short term or 15% long term?
Expert:  The Guy Behind the Tree replied 8 years ago.
Selling a business, assuming that it has been operated for more than one year, is a long-term capital gain, taxed at 15% under current rates.

There is some danger that a change in rates in the future might apply to your installment payments to be received in future years. You COULD elect to treat the sale as a cash sale and pay all the capital gains tax now instead of spread out over ten years, but THEN the risk would be default by your purchaser, and you would have already paid all the capital gains tax - $75,000, more than the first year's installment payment. Better to treat the sale as an installment sale and hope the rate stays at the current 15% rate.
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