Tax Consequences of Selling Private Stock
Corporations raise money through the sale of stock, offering investors an ownership stake in the company in exchange. Many large corporations sell their stock on public markets, such as the New York Stock Exchange. Cporations often remain privately owned because publicly traded companies face more regulations and pressure from investors. Although the IRS treats the sale of private stock the same as the sale of publicly traded stock, selling private stock can incur additional costs that alter the taxable gain.
The sale of stock results in either a capital gain or a capital loss, the difference between the purchase price and the sale price of the stock. Capital gains and losses fall into two categories, short-term or long-term, depending on how long the stock was held. Long-term capital gains are taxed at a lower rate than short-term capital gains. Stock sales are reported on IRS Form 8949 and Form 1040 Schedule D to calculate capital gains or losses.
When an investor purchases stock, he uses money that has already been taxed. To avoid taxing the money twice, the tax code allows investors to recover the cost basis tax-free. Basis includes the original purchase price of the stock, as well as any fees that were necessary to acquire the stock. Investors purchasing private stock often consult attorneys and accountants to ensure they are paying a reasonable price for their share of the company. Those fees increase the total cost of acquiring the stock, and they can be included in the adjusted basis.
Selling private stock is more difficult than selling stock on a public market. Unlike a public market, transactions are few and far between, so past sales prices are highly unreliable. Typically, the seller and the purchaser both consult accountants who are experienced in determining the value of closely held companies, to arrive at their own estimates of the stock's worth. Both parties negotiate a price. Whatever price the seller receives must be reported when calculating capital gains, regardless of other valuations.
Just as the cost of acquiring private stock increases the owner’s basis, the cost of selling private stock counts against any profit made off the sale. To be claimed against the gain, expenses must be indispensable to the transaction. For example, commissions to a broker and fees to a valuation specialist are indispensable, because the transaction could not take place without them. But fees to a financial adviser not involved with the transaction might not count.
Sean Butner has been writing news articles, blog entries and feature pieces since 2005. His articles have appeared on the cover of "The Richland Sandstorm" and "The Palimpsest Files." He is completing graduate coursework in accounting through Texas A&M University-Commerce. He currently advises families on their insurance and financial planning needs.