Ask HN: Donate shares of startup to charity for carryable tax deduction?
I'm a co-founder at an ~3 year old startup that has closed two rounds of funding and raising a 3rd, giving my founder shares a rather large paper valuation in the 10's of millions. However things have changed, and I lost faith in our leadership and product, and I lack power to do anything about it. So I already parted ways and am working on my next startup.
But those shares remain, and even heavily discounted as common stock my shares are still a life changing amount of money. However I'm personally certain that I have a snowball's chance in hell of actually seeing a liquidity event that pays me out. Nevertheless the investment market has spoken, and investors with the same or better access to information than I have now have decided to make further investments at an even higher valuation.
So.. can I cash out on this? My shares are illiquid, subject to all the usual restrictions. But I would have no trouble convincing the company to allow me to donate a large percentage to a charity of my choice, or even a self-directed charitable fund. I should then be able to claim a tax deduction equal to the paper value of the shares today. While my bank account will still remain empty, it would allow me to pay approximately zero federal taxes from now until I stop working, giving me effectively a 35% salary boost. And this wouldn't be tax fraud -- the new investments coming in demonstrate that sophisticated investors who know what they are doing and should be trusted more than me, do in fact think the company is worth this amount or more.
Did I miss something? Some googling hasn't shown any examples of this. I've read examples of successful entrepreneurs transferring shares into charitable organizations, but not any early-stage companies as far as I can see. Surely somebody has done this before?
Honestly, not a bad idea, but perhaps worth getting an IRS tax ruling for, since we're talking tens of millions (paper gains). However, you'd be set for life then, and the IRS wouldn't be able to challenge that decision in the future.
Alternatively, have you tried selling part of your stake to the new investors in the round, at a discount? If you could sell 10% of your stake, discounted, you just figured out the entire (actual) value of your equity stake.
You can offset charitable donations against income tax. The personal capital gains is avoided by transferring shares directly, without selling. (The charity typically then pays the capital gains via unrelated business income tax.)
> Alternatively, have you tried selling part of your stake to the new investors in the round, at a discount?
Unfortunately, no. I tried :(
Just a thought: having a large carry forward tax loss in itself has value, and if it were a sure thing you would get the deduction (e.g. through an IRS revenue ruling), then if I were you I'd probably look for some way to team up with someone. Ethics aside, there are probably ways to help someone else avoid taxes using this loss. Maybe you can make a million dollars, by helping someone else save 5 or 10 million in taxes.
As a non-lawyer, I don't understand how this will zero out your taxes. You will get X amount and then take a X deduction, so wouldn't it look like 0 change on your taxable income on your tax returns?
It's important to note that I hold stock as an 83(b) election, not a stock option. Options can also be donated in-kind but that is even more complicated.
That said, it seems it wouldn't zero out my taxes. If donated to a public charity it has the potential to reduce taxable income by 50% for up to five years. That's still significant though.
I will take this to a tax lawyer before proceeding, but I was hoping to find some precedent (for or against) before doing so. Tax lawyers are not cheap, and I'm presently living month to month (paper valuations notwithstanding).