So to recap:
- Angel investments aim to generate cap gains (which is better than ordinary income)
- Frequently, those gains are totally exempt from capital gains under Section 1202 (which is better than pretty much every other asset you can invest in ).
- If they’re not exempt, maybe they can be rolled-over under Section 1045 and eventually become exempt.
- If things go badly, the capital gain loss might become an ordinary loss under Section 1244 (which is a silver lining!).
- Don’t forget to factor in state angel tax credits in some cases, LLC passthrough losses in others.
After all that, you “net down” to an asset class where taxes have a much lower smaller impact on pre-tax investment returns than in many other assets.
Hopefully after these posts you’re now confused enough to (a) consult a professional tax advisor and (b) add a few early stage investments to your portfolio!
Any questions?