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Author: Wradical Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 121572  
Subject: Re: Accredited investments Date: 3/6/2014 1:38 PM
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I'm an accredited investor who should be selling their first private placement investment for a gain. I assumed this gain would be taxed as short term capital gains but the carried interest talk currently on the TV news has me wondering. Can any professional tax person on this site tell me if this is correct?

President Obama has just sent Congress his proposed 2014-15 budget. The carried interest proposal - which he has been proposing since he was elected, and was most seriously considered in 2010, is a single line item among many revenue measures. The actual Internal Revenue Code language is not included in this document. That would come from the House and Senate committees who produce the actual bill(s).

The 2010 proposed version wouldn't have applied to an ordinary investor - just partners (or LLC members) who provided services to the partnership. It would have characterized gains they realized from partnership interests they received as payment for services as ordinary income (subject to SE tax, too) rather than capital gains.

"Carried interest" is a term used on Wall St. The proposed changes to the tax code used other terminology as to the affected partners, and partnership interests. The devil was in the definitions, and that's why the measure never passed.

This is what Mitt Romney called "class warfare." And that's exactly how he made much of his fortune. For him, everything about that election was personal.

Some specifics: It was $50k in convertible debt invested in a bulletin board company which I bought a month ago. If converted to shares and sold at todays prices it would theoretically sell for $480k. The company has filed the S-1 and is in the process of registering the stock for sale with the SEC. I think the stock is overpriced and plan to sell. If the stock prices stays anywhere near where it currently is, it is very unlikely that I would hold the convertible debt or shares for more than a year in order to achieve long term capital gains. There is currently no options or ability to short the shares in order to lock in current prices and wait for taxes to become long term. I don't expect any, as the stock is thinly traded.

For that kind of money, you probably ought to be talking to a real live accountant, instead of anonymous posters using pseudonyms on an internet bulletin board whose trademark is a jester. Just a thought.

Are there any ways you might suggest to minimize tax expense?

Yes.

1. You should look over your portfolio and think about selling any investments with unrealized losses that you don't really want to keep.

2. If this is an extraordinary event, which it sounds like, you might think about larger-than-usual charitable contributions.

3. You might think about paying estimated state income taxes by year-end if the deal goes through. BUT - you should talk to your accountant about whether that will do any good, considering the AMT effect. It might be better to pay part, rather than all of it, to avoid wasting deductions. And the AMT-vs.-regular tax analysis will depend in large part on whether it ends up being long-term vs. short-term.

4. If you haven't maximized retirement income deductions or deferrals you should do so.

I do own an LLC and can probably produce sizeable losses in that LLC this year however I did not originally buy the convertible debt in the name of the LLC. I would certainly consider transferring it into the LLC if that would help.

As long as you are the sole member of the LLC, it is a disregarded entity for tax purposes. So it doesn't matter if you have the gain inside or outside the LLC. It IS important that the losses from the LLC are not from a passive activity. The gain you plan to realize will probably be portfolio capital gains, not passive income, since you're dealing in debentures-converted to stock- that you own personally. But be sure about that, too.

Bill
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