Skip to content

Back to basics: intro to angel investing taxes

Paul Clark
Paul Clark
Last updated: June 4, 2024
Venture south fallback

Before Thanksgiving, we replied to a Forbes article claiming the tax advantages from angel investing were not exciting compared with those from real estate investing.

Two weeks ago, an ecosystem partner emailed asking “Do your deals / investors use the Sec 1202 exclusion when exiting deals after a 5 year hold?”

Earlier this year, a member asked why we don’t ever mention the tax benefits of angel deals in our marketing and on our blog.

Clearly we are doing a bad job of explaining how taxes affect early stage investing. So today – as the season of year-end tax planning is in full swing! – begins a new series of “Back to Basics” posts on the tax implications of angel investing.

First up, quick but important disclaimers.

  • None of this is tax advice. We’re not qualified to give it, and cannot and do not!
  • In these posts, we simplify things, because the complexities and variations in life (and in the tax code) don’t really change the key lessons.
  • You should obviously consult your own professional advisors and conduct your own research before making any tax-related decisions. These posts are all just for information only.

Second, this can get complicated and arcane quickly. We’ve tried to make things simple and digestible, but where we’ve failed we encourage you to tell us and we’ll try harder.

Lastly, before we get too far into the details, a quick “tax 101.”

  • There are basically two types of ways to make money: “ordinary income” (things like wages and interest income) and “capital gains” (where you sell something for more than it cost you).
  • There are two equivalent types of taxes: ordinary income taxes and capital gains taxes.
  • There are also two basic kinds of companies: a “C-Corporation” (C-Corp) and a “Limited Liability Company” (LLC). Each kind of company can generate each kind of money and associate tax.
  • Hopefully you knew that already, but if not a detour through the basics of company structuring and taxes would help before digging in on angel investing tax issues. Either way, I hope the posts are understandable even if this isn’t your specialty.

One last thing: I find numbers helpful, so I’ll put some examples in italics in the following posts. Skip over them if you prefer concepts to numbers! A spreadsheet with some of the more complex calculations will come later.