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Exits: Taxes

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

So, finally! Our preferred shareholder has a distribution. Less than expected by the naïve optimists hearing the headline price, but still it’s nice to see money flowing back from an exit. Now what?

’Tis impossible to be sure of any thing but Death and Taxes.

Indeed. However, at last we have some good news: taxes are often not a big deal in angel investing.

If you had your series seed shares for five years, you should be exempt from any federal capital gain taxes (with some caveats) – see our post on Section 1202.

If you had them for more than six months but less than five years, you can probably roll over these gains into new investments and defer (and likely eliminate) these taxes too – see our post on Section 1045 rollovers.

If neither of those apply, you still pay capital gain tax rates, which are lower than your other tax rates. (Unless you held your shares for less than a year, in which case they are the same.) See our post on capital gains taxes. (If you invested in a convertible note, of course, you are paying ordinary income on the interest and any change of control premium. Another reason to dislike notes.)

So it’s possible that this mouthful of pie stays entirely on your plate and not the Treasury’s, and your post-tax net distributions likely aren’t too much different from your net distributions.