Ask HN: Donate shares of startup to charity for carryable tax deduction?

[SharesToCharity]

Throwaway account for ovious reasons.

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?

[charlesdm]

I'm not US based, but can you offset capital gains against income tax in the US? Most jurisdictions don't allow this. But perhaps there are income tax deductions for donations to a charity.

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.

[SharesToCharity]

> can you offset capital gains against income tax in the US?

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 :(

[charlesdm]

Another thing to consider if you do do this: if tax law changes are made, it could be that the carry forward mechanism no longer works indefinitely, but is capped at a certain amount of tax years before it is permanently lost (e.g. 5, 7, 9).

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.

[orange_county]

You really need to go see a tax lawyer and report back to us since I don't think anyone has a clear answer to this.

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?

[SharesToCharity]

I would never see the shares as income, because you can "donate in-kind" by transferring ownership of the shares to the charity directly. The charity then inherits the cost basis and pays the capital gains when they sell.

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.

[mtmail]

Check if https://founderspledge.com/about-us (https://founderspledge.com/faq) can offer free legal/tax advise here. They have a forum as well.

[SharesToCharity]

Interesting. It seems their pledge is structured to not do anything until an exit occurs. It's worth reaching out to them though.

[SirLJ]

The problem is there is no way to prove to the government how much they are worth, because as you said they are illiquid and there is no market... the best is to talk to a tax lawyer, because you can get into a lot of trouble for tax evasion...

[SharesToCharity]

Well as I mentioned the company is currently in the process of closing a 3rd investment round. Therefore investors that are much more sophisticated than me (in both the colloquial and regulatory sense), with access to better information (e.g. up to date financials, whereas I've been out of the loop) have decided that the company is worth $x per share. If the company follows best practices in assigning a 409(a) valuation for my shares based on this sale of preferred shares, that is as far as I can tell the gold standard for valuation. My concerns are simply a lack of faith in the management and product. I'm not sure how this is any different than me saying Disney is overvalued because I think Bob Iger is a bad manager and I didn't enjoy their latest films -- if I chose to offload some Disney stock the IRS will still use the market valuation. Well, the market value of illiquid common stock is the fair 409(a) valuation based on the latest sale of preferred shares.

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).

[meric]

Interesting idea. Ask lawyer about it and let us know. Maybe it could even be deducted against shares you cash out for your next startup!?