How do I determine my tax liability if the company I own stock in has negative net worth?

January 18, 2002

Subject:   Warrants and/or Stock for work
Date:   Mon, 3 Dec 2001
From:   Greg

Dear Michael,

I am consulting to several high tech firms that have, thus far large losses as they are still developing their technologies, but have yet to go to the venture markets. They are cash strapped and I am willing to provide services for stock or warrants as I am not in need of immediate cash. In each case these companies have negative networth. If I take stock for which the book value is less than zero what are the immediate tax implications, i.e. do I have an immediate tax liability? If the company is succesful, do I have a long-term gain or a short-term gain for tax treatment? Does it matter if I recieve stock as compensation as opposed to warrants? Any advice you can provide will be greatly appreciated.



Date:   26 Dec 2001

Hello Greg,

Warrants received as compensation are treated like non-qualified stock options.

Stock that has a negative book value still must be valued to determine the amount of income for receiving them. There may be intangible corporate assets that aren’t recorded on the books, such as the customer list and patents.

If the stock received isn’t subject to restrictions—it’s fully vested—the holding period will start when you receive the shares.

Good luck!

Mike Gray

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