Reply To: ISO sale and long term capital gain (2)

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Kaye Thomas

There is a general principle in taxation that says a transaction is to be taxed in accordance with its economic reality. The facts you recite may seem to suggest the company paid an inflated price for the shares as a way to provide you with additional compensation for services. Yet the reality could be different. It’s possible the company had some strong reason for wanting to redeem these shares, and made the offer at a price that would be hard to refuse. In any event there is no hard and fast rule that any amount paid above the 409A value must be treated as compensation.

In fact, depending on how they viewed the facts and circumstances, the IRS might object if the company treated part of the amount paid as compensation. That treatment would result in higher tax for you, but would also convert a nondeductible stock purchase expenditure into deductible compensation on the company’s tax return.