Equity Holder’s Tax Treatment, Special Equity Benefits

As a quick review, here’s an overview of how equity holder’s are taxed:

  • Dividends
    • Individuals are taxes at a 15% rate
    • Corporations have a ‘dividend received deduction’
  • Sale of Stock
    • Short-term Capital Gains
      • Individuals are taxed at 35%
      • Corporations are taxed at 35%
    • Long-term Capital Gains
      • Individuals are taxed at 15%
      • Corporations are taxed at 35%

Special Equity Benefits

  • Section 1202: 50% of gain is excluded if 3 tests are met:

    • The stock sold meets the definition of “qualified small business stock”
    • The stock sold was held by non-corporate taxpayer
    • The stock sold was held for more than five years
    • The note that the sale is taxes at the old LTCG rate of 28%- or 14% after exclusion
  • Section 1045: Rollover of gain on sale of qualified small business stock if:

    • The taxpayer is not a corporation
    • The stock sold was held for at least 6 months
    • The taxpayer elects to have Section 1045 apply
    • The replacement stock acquired within 60 days of the sale
    • The replacement stock qualifies as “qualified small business stock”
  • Section 1044: Rollover of gain on publicly traded securities into specialized small business investment companies

    • Taxpayer elects to have Section 1044 apply
    • The replacement property is acquired within 60 days of the sale
    • The replacement is stock in a “specialized small business investment company”
  • Worthless Stock

    • Capital loss Section 165(g)
    • Section 1244 stock: Will convert up to $100,000 of loss on a joint return of the Section 165(g) capital loss to an ordinary loss if:
      • The holder of stock is an individual
      • The stock when issued was stock in a small business corporation with $1 million of original capital
      • Stock was issued for money or other property
      • The holder must be the original owner
      • 50% or greater of the corporation’s income over the past five years must be something other than portfolio income

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