How JustAnswer Works:

  • Ask an Expert
    Experts are full of valuable knowledge and are ready to help with any question. Credentials confirmed by a Fortune 500 verification firm.
  • Get a Professional Answer
    Via email, text message, or notification as you wait on our site.
    Ask follow up questions if you need to.
  • 100% Satisfaction Guarantee
    Rate the answer you receive.

Ask BK-CPA Your Own Question

BK-CPA
BK-CPA, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 793
Experience:  Owner of a CPA firm
Type Your Tax Question Here...
BK-CPA is online now
A new question is answered every 9 seconds

I have personal source code from before my current employer.

Resolved Question:

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?
Submitted: 1 year ago.
Category: Tax
Expert:  Anne replied 1 year ago.

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!)

Expert:  Anne replied 1 year ago.
Our chat has ended, but you can still continue to ask me questions here until you are satisfied with your answer. Come back to this page to view our conversation and any other new information.

What happens now?

If you haven’t already done so, please rate your answer above. Or, you can reply to me using the box below.
Expert:  BK-CPA replied 1 year ago.

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: 793
Experience: Owner of a CPA firm
BK-CPA and 8 other Tax Specialists are ready to help you
Customer: replied 1 year 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?

JustAnswer in the News:

 
 
 
Ask-a-doc Web sites: If you've got a quick question, you can try to get an answer from sites that say they have various specialists on hand to give quick answers... Justanswer.com.
JustAnswer.com...has seen a spike since October in legal questions from readers about layoffs, unemployment and severance.
Web sites like justanswer.com/legal
...leave nothing to chance.
Traffic on JustAnswer rose 14 percent...and had nearly 400,000 page views in 30 days...inquiries related to stress, high blood pressure, drinking and heart pain jumped 33 percent.
Tory Johnson, GMA Workplace Contributor, discusses work-from-home jobs, such as JustAnswer in which verified Experts answer people’s questions.
I will tell you that...the things you have to go through to be an Expert are quite rigorous.
 
 
 

What Customers are Saying:

 
 
 
  • I really was impressed with the prompt response. Your expert was not only a tax expert, but a people expert!!! Her genuine and caring attitude came across in her response... T.G.W Matteson, IL
< Last | Next >
  • I really was impressed with the prompt response. Your expert was not only a tax expert, but a people expert!!! Her genuine and caring attitude came across in her response... T.G.W Matteson, IL
  • I WON!!! I just wanted you to know that your original answer gave me the courage and confidence to go into yesterday's audit ready to fight. Bonnie Chesnee, SC
  • Great service. Answered my complex tax question in detail and provided a lot of additional useful information for my specific situation. John Minneapolis, MN
  • Excellent information, very quick reply. The experts really take the time to address your questions, it is well worth the fee, for the peace of mind they can provide you with. Orville Hesperia, California
  • Wonderful service, prompt, efficient, and accurate. Couldn't have asked for more. I cannot thank you enough for your help. Mary C. Freshfield, Liverpool, UK
  • This expert is wonderful. They truly know what they are talking about, and they actually care about you. They really helped put my nerves at ease. Thank you so much!!!! Alex Los Angeles, CA
  • Thank you for all your help. It is nice to know that this service is here for people like myself, who need answers fast and are not sure who to consult. GP Hesperia, CA
 
 
 

Meet The Experts:

 
 
 
  • Wallstreet Esq.

    Tax Attorney

    Satisfied Customers:

    570
    10 years experience
< Last | Next >
  • http://ww2.justanswer.com/uploads/KU/KUMI95/2013-9-30_195031_kumar.64x64.jpg Wallstreet Esq.'s Avatar

    Wallstreet Esq.

    Tax Attorney

    Satisfied Customers:

    570
    10 years experience
  • http://ww2.justanswer.com/uploads/CU/Cuttinggirl/2011-10-29_03719_wcrop2.64x64.jpg Wendy Reed's Avatar

    Wendy Reed

    Enrolled Agent

    Satisfied Customers:

    3052
    15+ years tax preparation and tax advice.
  • http://ww2.justanswer.com/uploads/CATax/2009-08-04_204548_Mark.jpg Mark D's Avatar

    Mark D

    Enrolled Agent

    Satisfied Customers:

    985
    MBA, EA, Specializing in Business and Individual Tax Returns and Issues
  • http://ww2.justanswer.com/uploads/IN/insearchoftheanswer/2013-8-16_0233_attorney.64x64.jpg Richard's Avatar

    Richard

    Tax Attorney

    Satisfied Customers:

    3229
    29 years of experience as a tax, real estate, and business attorney.
  • http://ww2.justanswer.com/uploads/MY/MyVirtualCPA/2012-7-5_44024_cookmegan1.64x64.jpg Megan C's Avatar

    Megan C

    Certified Public Accountant (CPA)

    Satisfied Customers:

    6121
    Licensed CPA, CFE, CMA who teaches accounting courses at Master's Level
  • http://ww2.justanswer.com/uploads/JG/jgordosea/2012-6-7_43138_GordosVeritas.64x64.jpg jgordosea's Avatar

    jgordosea

    Enrolled Agent

    Satisfied Customers:

    2783
    I've prepared all types of taxes since 1987.
  • http://ww2.justanswer.com/uploads/OZ/ozaukeecpa/2012-6-7_193219_Picture1croppedandshrunk.64x64.jpg MequonCPA's Avatar

    MequonCPA

    Certified Public Accountant (CPA)

    Satisfied Customers:

    2231
    CPA, Over 30 yrs experience w/individuals and small businesses. Masters in Tax.