Kingscrowd: FAQs

View our in-depth guide to navigating startup investing taxes here and our article on avoiding startup investing tax surprises here.

Important: Tax laws are complex, change frequently, and vary for each individual’s situation. Always consult with a qualified tax advisor for guidance specific to your situation.

Potentially, yes. Startup investments come with risk, and the tax code allows you to deduct losses under certain conditions. Here’s a breakdown of the basics:

• Worthlessness: Your investment must be deemed worthless. This doesn’t always require formal bankruptcy, as factors like the company ceasing operations, disappearing founders, or prolonged inactivity can indicate worthlessness.
• Capital vs. Ordinary Losses:
  • Capital Losses: When you sell an investment for less than you paid, the losses are generally considered capital losses. These have limitations on how much you can deduct against ordinary income each year ($3,000 excess losses can be carried forward).
  • Ordinary Losses: If your investment qualifies under Section 1244 of the tax code, losses may be treated as ordinary losses. These can be deducted fully against any income in the year they occur. Always check for current limits.

Documentation is Crucial:  Keep thorough records of your investment, any news or communications about the company’s status, financial statements (if available), and legal documents if applicable. This evidence is crucial if claiming a deduction.

A Schedule K-1 is a tax form issued by partnerships, LLCs, or S-Corporations to their investors. It reports your share of the business’s income, losses, deductions, and credits. You may need this form to file your personal tax return accurately.

Note that not all LLCs will issue Schedule K-1 tax forms.

Many startup investors often need to file tax extensions. K-1 forms frequently aren’t available by the April 15th filing deadline. Filing an extension gives you more time to gather documents, but remember, you’ll still need to estimate and pay any taxes owed by the original deadline.

• Short-term gains: Profits (or losses) from investments held for less than one year, taxed as ordinary income.
• Long-term gains: Profits (or losses) from investments held for over one year, generally taxed at a lower capital gains rate.

Note that the tax center performs a simple calculation between your recorded “Investment Date” and your “Exit or Failure Date”. Incorrect date inputs will result in potentially miscalculating short term vs. long term gains.

Investors are responsible for verifying all information and short vs. long-term gain determination.

SAFEs (Simple Agreement for Future Equity) are not typically treated as equity investments. However, this varies depending on the specific language in the SAFE contract and may be interpreted differently by different people. SAFEs are agreements that may convert into equity shares if specific events happen in the future (e.g., acquisition, IPO). The exact tax treatment can be complex. Consult a tax advisor.

Once a SAFE converts to equity, then it may typically be treated as equity moving forward from the conversion date.

While not strictly tax advice, platform fees can often be factored into your cost basis, potentially reducing your taxable capital gains. Consult a tax advisor for specific guidance.

QSBS is a special tax provision that can significantly reduce or eliminate capital gains taxes on eligible startup investments.

If you acquired your QSBS stock after September 27, 2010, you have a potential exclusion of 100% of the gains, up to the greater of $10 million or 10x your investment basis in the stock

See our tax article for more details on QSBS.

You must generally hold QSBS stock for at least five years to qualify for the maximum exclusion.

In addition, your investment must meet the following requirements:

• Primary Issuance: The stock must be primary issuance directly from the company, not acquired through a secondary purchase from another investor. 
• Equity Investment: The security must be stock considered equity ownership in the company. This means that SAFEs and Convertible Notes do not typically start the 5-year holding clock until they convert to equity.
• Domestic C Corporation: The company must be a domestic C corporation (not an S-Corp, LLC, or partnership).
• Original Issue Date: The stock must have been issued after August 10, 1993.
• Capitalization Limit: At the time the stock was issued, the company’s gross assets must not have exceeded $50 million.
• Active Business Requirement: The company must be engaged in an active trade or qualified business (generally excludes businesses like consulting, banking, or investing).
• Acquired with Cash or Property: You must have acquired the stock directly from the company in exchange for money, property, or as compensation for services.

QSBS rules are complex. Consult a tax advisor to determine if your investment qualifies and to maximize the potential benefits

Tax laws provide potential deductions, such as under Section 1202 (QSBS), Section 1244 (loss on small business stock), and Section 1045 (rollover of gains). There may also be deductions at the state level. 

Consult our tax article here for more potential deductions.

Keep all investment documents, K-1 forms, notices of exits or failures, legal documents, and any communications with the companies you’ve invested in.