Tax Law (Questions About Taxes)/phantom tax cost basis

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Question
I am about to sell shares that I received in consideration for a patent (which was owned by me) that I assigned to a public company.  The company converted 100,000 of its preferred shares to common.  One year later, they issued those 100,000 common shares to me, which I now want to sell.  Is my cost basis the market value of the company's common stock on the day they converted or is my cost basis the market value of the company's common shares on the day they issued those 100,000 shares to me, a year later?

Answer
Your cost basis in the stock is equal to your purchase price if purchased with cash, or the adjusted basis of the asset that you exchanged for the stock.

You exchanged a patent for stock. What was your basis in the patent?

If you had purchased the patent, then we could set the value there.

If you developed the patent. . .

What was your cost there? Filing fees, did you use an attorney? Your basis may be low.

If the shares trade at $1, then you are getting a $100,000 with little or nothing to offset the entire amount may be a gain. Long term probably, but still a gain taxable both Federally and by the State.

Federal Long Term rates for 2013 are 0, 15, or 20% depending on your income.
State rates are generally your prevailing income rates.

So you'll be paying 15-30+% in taxes depending on other income, the state in which you reside, and actual sale price.

If the stock is trading at a dollar, $30,000 or more is a heavy price to pay. if it is trading at $5 it gets painful, as this increases, there may be some ways to mitigate the taxes. If the stock is trading at more than a dollar or your total income is pushing you into a higher tax rate, then call me.  

Tax Law (Questions About Taxes)

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Richard Fritzler

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Specializing in Business and Corporate taxation. Comparing the advantages and requirements of different business entities, such as Sub-S Corporations, LLC`s, Partnerships (Both Limited and General), Doing Business as a Sole Proprietor, or Using a C-Corporation. Issues regarding K-1 distributions, 1040, schedule C, 1120, 1120s. Are you considering domiciling a Corporation in a low tax state? I can review the benefits and misinformation that exists.

Experience

I have been in the business of assisting business owners in reducing their taxes and liability since 1986.

Organizations
National Small Business Owners Association.
Publications
Contributing author to "The Corporate Standard Newsletter".


Publications
Contributing author to "The Corporate Standard Newsletter".
Ezinearticles.com articlesbase.com

Education/Credentials
I have been in the business of assisting business owners in reducing their taxes and liability since 1986.

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