Investing comes with one certainty: if you make a profit, it will be taxed.
With that band-aid ripped off, we can still make this a positive conversation. After all, paying taxes on profits is still a preferable alternative to not making a profit.
So let’s assume you’re in the money, and are curious what tax forms may apply to your investment(s). I’m happy to provide some general information and hope you find them helpful, but first a message from our sponsor…
We interrupt our normal programming to make sure you know Vicinity cannot give you tax advice and will likely not be the entity providing tax documents to you. Individual situations will vary and you should consult your CPA.
Tax liability is largely determined by the type of entity you invest in: either an LLC (that is taxed as a partnership) or a C-corporation. This will be disclosed in a couple places in an offering, but can always be found on the company’s Form C, which is linked on the offering page through Vicinity. Something to be aware of is that an LLC can elect to be taxed as a corporation.
Tax implications will also be determined by the type of security: debt or equity.
Here’s a quick overview of each:
If your investment is…
Debt in a LLC or C-Corp: This could be a term loan, revenue sharing note, or convertible note (before it converts).
If you’ve received interest on your debt investments, you should receive a form 1099 from the company to include with your tax filings.
More on a Rev Share: these notes are classified as a contingent payment debt instrument since the interest on revenue sharing investments cannot be calculated until actual payments are made. So the interest calculation is done at the end of the year when all payments for that year have been made.
Equity in a LLC: This would likely be in the form of membership interest in the company. If you made an equity investment or hold convertible notes that have converted, you should receive a K-1 form from the company by March 15th each year.
Note: a SAFE (Simple Agreement for Future Equity) or Convertible Note (before conversion), no K-1 will be due to you.
Equity in a C-Corp: equity/shares in a C-Corp will not be issued a K-1 form and generally will only need to report income when they realize a gain or loss for tax purposes (e.g. selling a position, or earning interest).
If dividends were paid, you would receive a 1099 (though this is uncommon for early-stage businesses).
A few other miscellaneous points:
If you sold a security acquired on Vicinity in a private transaction and realized a gain, the capital gain is taxable.
If you sold a security acquired on Vicinity in a private transaction and realized a loss, it would qualify as a capital loss and be used to offset capital gains you may have from other investments.
If the company you invested in goes bankrupt, the company is responsible for providing the tax documents to reflect any loss.
Now that you know about LLCs, and equity shares, and tax forms (oh my!), you can drop your newfound knowledge on your investment decisions and tax advisor. Or at least you have a few acronyms and tax form names to throw into your favorite search engine if you want to dig deeper.