Shares received as a result of profits interest - when to file?

[plaintiffenmasse]

Hi there

In 2021 company A I had profits interests in as an employee was acquired by company B.

I received 75% cash and 25% stock of company B. All this was reported on a K1.

I paid tax on the cash portion in 2021.

The stock was not given to me til November 2023.

I have not sold the stock.

My questions:

1. Do I need to pay taxes in my 2023 return using the K1?

2. If not, is the taxable event when I sell the stock?

3. Will short or long term capital gains taxes be applied?

Thank you!

[RobertB4444]

1. Do I need to pay taxes in my 2023 return using the K1?  Yes.  The K1 reports your earnings as an owner of the business.  Whatever earnings are reported on the K1 are taxable to you on your individual tax return as long as you are a part owner of the company.

2. If not, is the taxable event when I sell the stock?  When you sell the stock it is a taxable event to you.  You will either sell the stock for more than what you 'paid' for it resulting in a taxable gain, or for less than what you paid for it resulting in a deductible loss.

3. Will short or long term capital gains taxes be applied?  It depends on when you sell it.  The stock is not considered to be yours until you have control over it.  In the case of your example that appears to be November of 2023.  So if you sell the stock before you have owned it one year then it will be taxed as regular income (or short term) and if you sell it after you have had it more than one year it is taxed much more favorable (long term).

@plaintiffenmasse 

[plaintiffenmasse]

Thank you.

If the K1 only has a stock portion left to pay tax on (I paid tax on the cash portion back in 2021), presumably my tax liability is $0? I ask as the stock had a market price of $11 when it was issued to me for free but is now worth only $5. I still haven't sold.

[RobertB4444]

Are you certain that what you have is a K1?  It sounds like you have received a different form from this company.

A K1 is a fairly long form.  It lists out all of the taxable activities of a company that you - as a part owner - are responsible to pay taxes on.  

@plaintiffenmasse 

[plaintiffenmasse]

It is 100% a K1. That’s why this is confusing. 

[RobertB4444]

Then you need to consult a tax professional or have someone go over your taxes with you.  Because you are not issued a K1 for a stock sale.  If you sell the stock of a company then you are no longer an owner of that company and will no longer receive a K1.  So either you received earnings prior to any sale or you were issued this form in error. 

 (I would guess that you have earnings from this company that you were just not aware of - but it certainly wouldn't be the first time someone received a K1 that wasn't supposed to get one).

@plaintiffenmasse