[FoRK] so is it for real now?

J. Andrew Rogers andrew at ceruleansystems.com
Mon Oct 13 20:12:21 PDT 2008

On Oct 13, 2008, at 7:04 PM, Lucas Gonze wrote:
>> In the original policy of yore, you could defer capital gains taxes
>> indefinitely by reinvesting the gains
> You can?
> I have read that a C corp can shuffle gains back and forth between
> entities with different fiscal calendars, though I don't know the
> details.  Is that what you're talking about?

Nope, nothing clever like that.

See the Internal Revenue Code, starting at 26 USC 1202, but it is  
scattered about in other parts as well. It is something simple you can  
do on your 1040 filing.

There are a number of individual tax breaks and tax-free investment  
rollovers for investments in qualified small companies. In the best  
known case, "qualified" means something like a domestic C corp, active  
non-professional business, and something like gross assets less than  
$50M (though fair market value of the company may be substantially  
higher).  Popular for venture investors.  As long as you keep rolling  
the investment over into qualified companies, it is like one long  
capital gains investment transaction -- you only pay capital gains  
taxes on what you pull out of the game.

Some states (like California) have tax elections that mirror the  
Federal tax law concerning these types of tax deferrals. I am less  
familiar with the tax breaks, but I seem to recall that for longer  
holding periods (like 5 years?) it also cut the long-term capital  
gains rate in half. It has been a long time since I went over this,  
and I am not a tax professional.

Unless one is in the business of investing in small companies, it  
seems that hardly anyone knows that these types of capital gains  
deferrals exist. The rules are pretty liberal and flexible for the  
most part as I recall; the venture capital community had their hand in  
tweaking them.


J. Andrew Rogers

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