Tell HN: Company returned 3X, but I (investor) may lose money • Hacker News Board

Re: Tell HN: Company returned 3X, but I (investor) may lose money

#11

Post by beagle3 » Mon, Jul 11, 2011, 1:35 AM UTC

sa5 wrote: post #8

antimora wrote: post #3

Earlier quoted context omitted.

And the sadder part is that richer investors know their way around those taxes better than new comers because they have access to accountant professionals who can advise to pay less tax.

I'm not a tax expert so this assumption may be wrong, but if the 2X is being taxed as ordinary income at 35% wouldn't that imply that beagle3 is making at least $379,150 + 2X this year? I would consider someone with that kind of income to be rich. Also, if the stock has gone down 40% can't you claim that as a loss when you sell and lessen your overall tax burden?

Well, it might be _just_ 33% depending on how my other projects work out this year. Not much of a difference those 2%. I've been doing well so far with actual work, and my investments seem to be going well, except that I keep getting hit on the crazy taxes (to the point that GOOD investments end up as losses!)

The reason I "told HN" is that I was not aware of how bad not optimizing the taxes could be; I thought I'm wasting 5-10% of potential profits by not optimizing. Turns out to be more than 100% on a totally ordinary deal.

> Also, if the stock has gone down 40% can't you claim that as a loss when you sell and lessen your overall tax burden?

Not really - not with AMT.

Re: Tell HN: Company returned 3X, but I (investor) may lose money

#12

Post by beagle3 » Mon, Jul 11, 2011, 1:36 AM UTC

teyc wrote: post #5

Couldn't you have written 6-month PUT options?

I probably could. The stock went down during the week I was trying to get clearance from my lawyer :( It used to be illegal to hedge against SEC rule 144; Apparently, it is now legal (but check with your lawyer before you hedge -- don't trust an anonymous person on the internet)

Re: Tell HN: Company returned 3X, but I (investor) may lose money

#13

Post by beagle3 » Mon, Jul 11, 2011, 1:37 AM UTC

NonEUCitizen wrote: post #4

Do SEC rules prohibit you from hedging?

They used to explicitly prohibit you.

As far as I can tell, they don't explicitly prohibit you but they say something like "we'll look at it badly if you do" in their publications. Make of that what you will.

Re: Tell HN: Company returned 3X, but I (investor) may lose money

#14

Post by dpe82 » Mon, Jul 11, 2011, 1:52 AM UTC

beagle3 wrote: post #10

dpe82 wrote: post #7

I always thought these deals were typically done as stock swaps so it doesn't affect your capital gains?

Only if done in very specific way (google "triangular merger", there are several variations). This deal wasn't, and I wasn't in the driver seat to make it that way.

That's what I thought. How do they offer cash in that type of deal? As a fixed price purchase agreement that hits after the holding period?

(I'm still learning how all of this works..)

Re: Tell HN: Company returned 3X, but I (investor) may lose money

#15

Post by aquark » Mon, Jul 11, 2011, 2:28 AM UTC

beagle3 wrote: post #13

NonEUCitizen wrote: post #4

Do SEC rules prohibit you from hedging?

They used to explicitly prohibit you. As far as I can tell, they don't explicitly prohibit you but they say something like "we'll look at it badly if you do" in their publications. Make of that what you will.

Why would they care? I really can't think of a rationale for that stance.

OTOH why would I presume one should exist?

Re: Tell HN: Company returned 3X, but I (investor) may lose money

#16

Post by ldd- » Mon, Jul 11, 2011, 2:45 AM UTC

beagle3 wrote: post #9

ldd- wrote: post #6

Sounds like you're in the same boat as everyone else in your round, right? It's simply a function of the timing of the deal (less than a year since you invested, apparently) and the deal structure (cash vs. stock). Stock inherently requires the acquired company to share the risk of the deal. If the stock goes down further, you should be able to claim the loss on your taxes when you sell, which should mean you would n…

> Sounds like you're in the same boat as everyone else in your round, right? 5% of the investment is accounted for by US tax payers. The rest are not, so I'm not in the same boat. > If the stock goes down further, you should be able to claim the loss on your taxes when you sell, which should mean you would need more than a 52% total decline to go in the red on the deal. No. The tax event is on the grant, not a capita…

>No. The tax event is on the grant, not capital gain (therefore capital loss does not cancel). Furthermore, if I fall under AMT (very likely), I can't deduct anything.

Ooph . . . sorry. However, just so I understand, if your shares were to rise above the transaction price, would you not be subject to capital gains tax on the gain? It would seem a bit misaligned if you could be taxed on gains but not benefit from losses (however, I wouldn't put that past the codes and that still wouldn't account for AMT issues).

Good luck with it!

Re: Tell HN: Company returned 3X, but I (investor) may lose money

#17

Post by teyc » Mon, Jul 11, 2011, 3:26 AM UTC

beagle3 wrote: post #12

teyc wrote: post #5

Couldn't you have written 6-month PUT options?

I probably could. The stock went down during the week I was trying to get clearance from my lawyer :( It used to be illegal to hedge against SEC rule 144; Apparently, it is now legal (but check with your lawyer before you hedge -- don't trust an anonymous person on the internet)

Sorry, I should have mentioned IANAL and not even a US citizen. It'd probably be seen as trying to circumvent laws wouldn't it? That'd be bad.

On the other hand, the major investors would lose out even more wouldn't they? Didn't they build any protection into their sale clauses?

Re: Tell HN: Company returned 3X, but I (investor) may lose money

#18

Post by beagle3 » Mon, Jul 11, 2011, 3:46 AM UTC

ldd- wrote: post #16

beagle3 wrote: post #9

Earlier quoted context omitted.

> Sounds like you're in the same boat as everyone else in your round, right? 5% of the investment is accounted for by US tax payers. The rest are not, so I'm not in the same boat. > If the stock goes down further, you should be able to claim the loss on your taxes when you sell, which should mean you would need more than a 52% total decline to go in the red on the deal. No. The tax event is on the grant, not a capita…

>No. The tax event is on the grant, not capital gain (therefore capital loss does not cancel). Furthermore, if I fall under AMT (very likely), I can't deduct anything. Ooph . . . sorry. However, just so I understand, if your shares were to rise above the transaction price, would you not be subject to capital gains tax on the gain? It would seem a bit misaligned if you could be taxed on gains but not benefit from loss…

> if your shares were to rise above the transaction price, would you not be subject to capital gains tax on the gain?

Yes. The way the IRS views it, I was given a an ordinary income bonus which consisted of new shares, and which was valued at $Z during the grant (and taxed as such, at that second). From now on, I own shares, so capital treatment goes into the future. If the stocks drop, I will have capital loss when I sell them -- but I need some other capital gain to net against.

Re: Tell HN: Company returned 3X, but I (investor) may lose money

#19

Post by beagle3 » Mon, Jul 11, 2011, 3:49 AM UTC

dpe82 wrote: post #14

beagle3 wrote: post #10

Earlier quoted context omitted.

Only if done in very specific way (google "triangular merger", there are several variations). This deal wasn't, and I wasn't in the driver seat to make it that way.

That's what I thought. How do they offer cash in that type of deal? As a fixed price purchase agreement that hits after the holding period? (I'm still learning how all of this works..)

No, there can be a cash at the beginning, no larger than 20% or 50% of the deal (depending on whether it is reverse or forward merger. Get a tax specialist if these details matter to you and you are in the driver seat)

Re: Tell HN: Company returned 3X, but I (investor) may lose money

#20

Post by beagle3 » Mon, Jul 11, 2011, 3:53 AM UTC

aquark wrote: post #15

beagle3 wrote: post #13

Earlier quoted context omitted.

They used to explicitly prohibit you. As far as I can tell, they don't explicitly prohibit you but they say something like "we'll look at it badly if you do" in their publications. Make of that what you will.

Why would they care? I really can't think of a rationale for that stance. OTOH why would I presume one should exist?

Well, it's basically a protection against intricate pump-and-dump schemes that include mergers and acquisitions - the rule basically says shares allocated (rather than _bought_ or invested into) need to be held for 6 months. (It is sometimes known as "lockup period", and versions of it exist in many countries).

However, the entire allocated stock in this deal is ~1% of the buying company; so this protects no one. Even if all of the allocated shares were sold on day 1, the stock would not have moved more than ~5% as a result. However, the market conditions has caused it to move 40% in a week.