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RioTubes
Level 2

I sold stock that resulted in a short-term gain. 10% of these sales proceeds were held back by escrow and paid out 12mo later. Are the holdback proceeds ST or LT gain?

This pertained to an investment in a private company that was sold (merged with) a public company. The merger and sale agreement contemplated 10% of the sales proceeds as "holdback" to be distributed one year later after satisfaction of certain conditions included in the purchase and sale agreement. The original gain was short-term in nature (April purchase and September sale in same year) but the holdback was distributed 12 months later.

5 Replies
TomD8
Level 15

I sold stock that resulted in a short-term gain. 10% of these sales proceeds were held back by escrow and paid out 12mo later. Are the holdback proceeds ST or LT gain?

The issue is how long you held the asset.  If you held the asset one year or less, the gain is short term - regardless of when the proceeds were distributed.

https://www.irs.gov/taxtopics/tc409.html

**Answers are correct to the best of my ability but do not constitute tax or legal advice.
RioTubes
Level 2

I sold stock that resulted in a short-term gain. 10% of these sales proceeds were held back by escrow and paid out 12mo later. Are the holdback proceeds ST or LT gain?

Thanks for the reply. OK, so even the 10% of the proceeds that were distributed one year in 2016 later (the "holdback") is a short-term gain since the shares were bought and sold in 2015. Does that mean that the gain associated with just the Holdback should have been reported  should have been in 2015 even though the money was not distributed, or is it appropriate to recognize this gain with the 2016 tax return?
TomD8
Level 15

I sold stock that resulted in a short-term gain. 10% of these sales proceeds were held back by escrow and paid out 12mo later. Are the holdback proceeds ST or LT gain?

Did you receive a 1099-B in 2015?  If so, did it show the entire amount of the sale proceeds?
**Answers are correct to the best of my ability but do not constitute tax or legal advice.
RioTubes
Level 2

I sold stock that resulted in a short-term gain. 10% of these sales proceeds were held back by escrow and paid out 12mo later. Are the holdback proceeds ST or LT gain?

Sorry for the late reply as I had to pull the 2015 1099-B. It shows the sales proceeds distributed to me in 2015 (the year in which the sale occurred) but not the amounts representing the 10% holdback. Nor does the 1099-B show the gains (and whether they are ST or LT) because the cost basis and purchase dates were not provided to JPMorgan (escrow agent) by the company. I made three investments in the company: in Series A in 2008, in convertible notes in 2012 (that were later converted into Series B equity) and in Series B round that occurred in May 2015. The company was private and sold to a public company for cash in September 2015. So my take is that the last investment (May 2015 in the Series B) is the only short-term gain. The complication is that 10% of the total proceeds across all three securities were held back under the merger agreement and distributed one year later. The 10% holdback associated with the 2008 and 2012 investments is obviously LT gain. It sounds like from the initial response to this thread that the holdback associated with the 2015 investment is Short-term Gain, but perhaps is appropriate to file on the 2016 tax return since it was not reported on the 2015 1099-B?
TomD8
Level 15

I sold stock that resulted in a short-term gain. 10% of these sales proceeds were held back by escrow and paid out 12mo later. Are the holdback proceeds ST or LT gain?

Since the holdback was not accounted for on the 2015 1099-B, I agree.  Hopefully you will be receiving a 2016 1099 of some sort to account for the funds disbursed in 2016.
**Answers are correct to the best of my ability but do not constitute tax or legal advice.

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