when do i need to report a debt for equity swap?

I loaned a startup money and they gave me equity in the company in return. The company is private, and the equity was based on their valuation. I was told that I don't need to report the swap for tax purposes until it's sold, and that net profit would be what remains after the loan amount is deducted. Is this correct? If not, what needs to be done to be tax compliant?

343

Expert Alumni

Jan 25, 2021 7:54:47 AM

You do not need to report a "debt - equity swap" transaction on your tax return. This was a 'purchase' on your part and the purchase of securities is not a taxable event.

You will need to report the sale of those securities in the year they are sold, and will calculate the profit (loss) using the value of the debt you "swapped" for those equity securities.

Level 2

Jan 25, 2021 8:05:42 AM

Thank you for this very helpful reply.

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when do i need to report a debt for equity swap?