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BK-CPA
BK-CPA, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 933
Experience:  Owner of a CPA firm
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I have personal source code from before my current employer.

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I have personal source code from before my current employer. As part of a series A investment deal, we have agreed to an offer of stock to purchase the source code. My employer is a company, I am not. I will not be in the control group. I have settled any issues where we might get "fancy" here. I know if I am granted stock I owe on capital gains. My question is what is the situation if I purchase the stock with my IP, which I assume is another way of saying my IP was purchased with stock.

I believe it will be captial gains based on stock FMV - itemized cost of code. What would I need to bring to an accountant/lawyer to show the code's basis?

Anne :

Hi

Anne :

Thank you for using justanswer.

Anne :

Before I give you your answer, I want to check on something. Would you mind waiting just a minute?

Customer:

Sure

Anne :

Since you're dealing with stock that allow you to purchase the stock at a fixed price, your cost basis is whatever you $

Customer:

I'm dealing with an asset that I am using to purchase stock at a price. My cost basis is whatever I... ?

Anne :

your cost basis is what you paid for the stock at the time you exercise the option

Anne :

I'm sorry for the delay........dog REALLY wanted out

Anne :

you will need to bring the record of when you exercised the option, and how much you paid for it

Customer:

This is not an option situation (is it?) This is my code to be bought with ~200,000 shares of vested stock.

Customer:

There is a separate work-for-hire contract where I get salary/options.

Anne :

along with what you received (or sold ) the stock for

Customer:

So I worry I am going to be taxed on the stock now, and then again on sale later. But I wonder how much now? If this were a stock grant, it'd be 100% capital gains. If I were a corporation in an acquisition it would be 0%. But I am an individual at the moment.

Anne :

IP is an option, since you have never really had the actual stock

Anne :

no

Anne :

you will pay on the option now

Customer:

My IP is the "option"?

Anne :

but that $ amount becomes your basis

Customer:

How do I calculate that basis?

Anne :

when you sell the stock you will only pay on the difference between what you purchased it for and what you sell it for

Anne :

there is generally a 3rd party that oversees the stock option program for your company

Customer:

I purchased it for my code price... so if I get $10 of stock and the IP is valued at $5... then we're successful and I sell stock later at $20... then it's a capital gain of 20-5?

Anne :

yes

Anne :

you have that correct

Customer:

Ok, so if I have stock and they have my IP for 2013, and it's still in start-up mode and I hold the stock. I owe how much? 10-5?

Anne :

yes, when you actually sell the stock

Customer:

But if I were granted the stock I would have to pay capital gains?

Anne :

no

Customer:

I am talking stock, not stock options. Stock is considered income.

Anne :

purchasing the stock creates ordinary income.......it is not subject to capital gains until you actually sell it

Customer:

Ah! ok, so going back to my purchase situation. How much ordinary income would be the case if I get $10 of stock for IP valued at $5?

Anne :

I'm sorry but could you rephrase that please?

Anne :

wait.........please

Customer:

I make IP valued at $5, but sell it at $10. Is that ordinary income? Also what if I make IP valued at $5, but sell it at $1.

Anne :

let me see if I can rephrase my answer so that we are both on the same page

Customer:

Ok.

Anne :

bear with me a moment

Customer:

Yep (I was confusing the terminology of capital gains v. ordinary income)

Anne :

that's ok..........because I was confusing your stock option plan

Anne :

let me start over ......maybe we can both make this more clear

Customer:

Ok.

Anne :

there are 2 types of stock option plans

Anne :

is it safe to assume that these are incentive options

Anne :

as opposed to common or non qualified plan

Anne :

generally speaking ISO's are given to the upper management

Customer:

My IP/code for ~200,000 shares of common stock (not options)

Customer:

I am CTO/VP Engineering.

Anne :

ok

Anne :

just a minute here

Customer:

"fully vested shares of the Company's Common Stock"

Anne :

I'm re reading your question

Customer:

This is also a "Intellectual Property Purchase and Assignment" not an acquisition of a company.

Anne :

thank you for that clarification

Anne :

it helps alot

Customer:

(we have settled on the idea that I am not a founder and I will not be part of the control group)

Anne :

ok......give me one more minute here

Anne :

Regardless of how you receive the stock, your cost basis is what you pay for the stock

Customer:

So a grant is 0 for the stock. But how do I calculate what I "pay" when it is property?

Customer:

(in what I give to me accountant next year)

Customer:

Because we settled on a price, me and the CEO believe that it's worth exactly what he paid.

Anne :

are they including the cost as part of your wages?

Customer:

this code existed outside any work-for-hire for this or any company.

Customer:

I had it "in my garage" so to speak and I said I'd sell it to the company because it's of principal business interest.

Anne :

are you planning on selling the stock immediately

Customer:

No

Customer:

(I can't, this is at-series-A so there's no market for the stock)

Anne :

While I am still going to do some additional research..........I am going to "opt our" so that this question will go back to the open board

Customer:

Ok, the hunt continues.

Anne :

if no body else locks on this question, I will come back after I finish the research

Customer:

Ok thank!

Customer:

(thanks!)

Hello and thank you for your question.

.

The exchange of a personal document that is your own work and for which you have copyright (including computer code) for property (stock) is a taxable exchange where an ordinary gain or loss is recognized (IRC 1001, 1221(a)(3)).

.

Sometimes, people try to put things into corporations so that they can in turn sell the stock of the corporation...

.

Your cost basis, probably almost nothing, is the sum of all the direct costs incurred creating the property (see IRC 1011 and following).

.

I hope this is helpful.

BK-CPA, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 933
Experience: Owner of a CPA firm
BK-CPA and 2 other Tax Specialists are ready to help you
Customer: replied 3 years ago.


What does it mean that my cost basis is almost nothing?

 

So the code is not a capital asset and thus has no meaningful value here... i.e. there's no meaningful difference tax-wsie between getting the stock here and getting the stock as a pure grant? Is this correct?

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