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Lev
Lev, Tax Advisor
Category: Tax
Satisfied Customers: 28082
Experience:  Taxes, Immigration, Labor Relations
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I am an employee of an LLC. At the time of my employment (2

Customer Question

I am an employee of an LLC. At the time of my employment (2 years ago) I received a grant of "non-voting profits interest" called "incentive units" that vested over time. At the time of the grant and at the time of vesting the value of these profit interest
were zero. The LLC has now received a buy out offer and the LLC is offering to buy my vested profits interest (incentive units). Will the money I receive from the LLC for my vested profit interests (incentive units) we subject to be reported on my W2 and subject
to withholding and do I have capital gain on the sale of my profit interests?
Submitted: 1 year ago.
Category: Tax
Expert:  Lev replied 1 year ago.

These "incentive units" are capital assets and if you sell them and realize any gain - that gain is usually treated as capital gain.

Because at the time of the grant and at the time of vesting the value of these units were zero - the basis was not established - and you did not invest any money.
When you eventually exercised vested units - the difference between the FMV (which is actual selling price) and granted price (which was zero in your case) - is reported as wages - because you were awarded as a compensation for your services as an employee.
So - that amount is reported on W2 as wages AND added to your basis.
When you will report the sale transaction on your tax return - most likely - you will not have any gain or might realize a small loss if the broker charge any fee to handle that transaction.

But essentially your basis and your selling price would be same - and you woudl not have any capital gain.

Still you will need to report the sale transaction on your tax return.

Expert:  Lev replied 1 year ago.

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