Q: When does my capital gains holding period start for shares acquired upon exercise of a warrant I received from a company in connection with an investment or a loan (i.e., not a warrant issued in consideration for services)?
A: If you exercise your warrant by paying cash for the exercise price, your capital gains holding period does not start until you exercise your warrant. (Unfortunately, there is some uncertainty as to whether the holding period starts on the day of the exercise of the warrant or the day after. See here.)
If you exercise your warrant in a cashless exercise, there is uncertainty as to the right answer. Some taxpayers argue that the cashless exercise of a warrant is a recapitalization event itself entitling the taxpayer to tack their holding period back to the date of the acquisition of the warrant. See the attached letter, in which the New York State Bar Association states: “If a cashless exercise constitutes a recapitalization, the warrant holder’s holding period for the stock received upon exercise would generally include the holding period for the warrants.”
Yesterday Davis Wright Tremaine LLP, Clarity Health Services, Faultline Ventures and iMedExchange hosted the first innovateHealth Capital Summit at the Seattle offices of Davis Wright Tremaine. More.
innovativeHealth is a fast-growing group of health care technology and services stakeholders focused on driving innovation in the health care industry and building awareness of the health care services and technology cluster in the Pacific Northwest. innovativeHealth both connects our members within the region and connects our cluster to the larger national and global markets.
The group’s first two events were standing room only. More than 50 health care organizations were represented at the March 2009 event, which focused on entrepreneurial opportunities created by the Obama administration’s stimulus plan, budget and health reform initiatives.
In what could be a serious blow to the venture fund industry, the President’s tax proposals contemplate taxing carried interest as ordinary income, subject to ordinary income tax rates and self employment taxes.
The proposal states that it “is not intended to adversely impact qualification of a real estate investment trust owning a carried interest in a real estate partnership.”
Excerpt from a summary of the President’s proposal is below. You can also find them on pages 25 and 26 of this document.
In what could be a very welcome development in startup land, if it becomes law, President Obama has proposed that there be NO capital gain taxation of gains from the sale of qualified small business stock issued after February 17, 2009 and held for 5 years. Presumably the limitations of IRC 1202 that cap the QSB benefit at the greater of (i) 10x a taxpayer’s basis in stock issued by the corporation and disposed of during the year, or (ii) $10M reduced by gain excluded in prior years on dispositions of the corporation’s stock would still apply. However, this would still be quite a benefit.
See pages 13-14 of this document. The entirety of pages 13 and 14 are also quoted below.
“When X, an entity classified as a partnership for federal tax purposes, elects under § 301.7701-3(c)(1)(i) to be classified as an association for federal tax purposes, the following steps are deemed to occur: X contributes all of its assets and liabilities to the association in exchange for stock in the association, and immediately thereafter X liquidates by distributing the stock of the association to its partners. Under § 301.7701-3(g)(3)(i), these deemed steps are treated as occurring immediately before the close of the day before the election is effective. Thus, the partnership’s taxable year ends on December 31, 2009, and the association’s first taxable year begins on January 1, 2010. Therefore, the partnership will not be deemed to own the stock of the association during any portion of the association’s first taxable year beginning January 1, 2010, and X is eligible to elect to be an S corporation effective January 1, 2010. Additionally, because the partnership’s taxable year ends immediately before the close of the day on December 31, 2009, and the association’s first taxable year begins at the start of the day on January 1, 2010, the deemed steps will not cause X to have an intervening short taxable year in which it was a C corporation.”
Rev. Rul. 2009-15.