The Rundown (3/11/21)
I host SPAC Happy Hour on the Clubhouse App every Friday at 4:20pm EST. Click the link to join our room! 🍻
Our guest this week will be Brian Garrett-Glaser, Editor of eVTOL Magazine. He has a unique understanding of the newly created Electric Vertical Takeoff & Landing industry. Several companies in this sector are poised to go public via SPAC such as Archer, Lillium, and Volocopter and he’s going to tell us what’s going on behind the scenes.
You can also join our room by following @BillSPACman and @MichaelRippe
Welcome to The Rundown! Each week we’ll feature a couple talented guest writers to give their thoughts on whatever is happening in the markets right now.
One of our guest writers this week is SPACdaddy.com. Please be sure to also give @SPACdaddy a follow on Twitter!! He’ll be sharing his thoughts about your SPAC Taxes that are coming up within a month.
TAX & SPACs: Call me TAXdaddy
Let me start this off transparently: I’m not an accountant nor am I your financial advisor. This is a brutally boring subject & I did my best to translate the complex lingo into English. I usually dumb down pretentious Wall Streeters & today I did it for boring old accountants.
For this article, let me be loud & clear: THE IRS IS OUT TO GET YOU.
SPACs have only recently been in the limelight & I’m confident your accountant will need to learn how to deal with them. When your accountant needs to learn, that’s $ billed on your clock. Taxes are without a doubt the most boring subject… but everyone does them & this article will save you from migraines.
I took one for the team by doing my taxes early & I tackled this with my buddy that’s a CPA on the SPAC desk at a major firm. Due to the IRS being a countryclub for useless accountants & bickering lawyers, it was virtually impossible to solve every problem definitively.
Bottom line: Get your questions in now before April 14th because 2020’s SPAC tax is gonna get messy.
(If you’ve been around the trading block & are here for strictly SPAC related tax implications, scroll towards the bottom. I’ve pointed out a bunch of nuanced SPAC questions & did my best to navigate the IRS maze)
YOU WILL RUN INTO HEADACHES
Most of you went from buying ETFs to buying/selling new SPACs every month. All of those sales and purchases need to be reported to the IRS. Unless you have a CPA who owes you one, you’re gonna be on the hook for entering all of these into a tax software. My advice: use a tax software that will automatically import your brokerage information. Entering them manually will piss you off.
At the end of the year, your brokerage (Robinhood, Schwab, Fidelity, etc) itemizes your trades into a 1099B document that can be fed into a tax software. Go to your brokerage’s settings & look for your tax info. Then consider 1 of these 7 softwares & input your itemized report.
TurboTax Premier — Best Full-Featured Tax Software
TaxAct Premier+ — Best Value-for-Money Tax Filing Service
H&R Block Premium — Best In-Person Support
eSmart Tax Deluxe — Unlimited Real-Time Tax Advice
TaxSlayer Premium — Speedy, Accurate Filing
Liberty Tax Deluxe — Decent Service for Confident Filers
Credit Karma — Best Free Online Tax Filing Service
Hold 10-20% of your gains for taxes
You’re probably sitting on some solid SPAC gains in your brokerage right now. Don’t be the idiot that spends it all and then freaks out come tax time. You’ll thank me later when you’re not selling shares of your new SPACs to pay taxes on your old ones.
Capital Gains: Long Term vs Short Term
If you sell the shares of a SPAC (or any stock) that you’ve held for 1+ years, any profits count as a Long Term Capital Gain.
Knowing that many of you are ADHD crypto day traders & penny stock addicts, SPAC’s you’ve held & sold less than 1 year is a Short Term Capital Gain.
See the difference? Short term gains are taxed at 10% higher OR MORE than long term gains.
Do you have shares of Draftkings – $DKNG (was DEAC) or Virgin Galactic – $SPCE (was $IPOA) that you bought last February? If you do, congrats because you’re up 5-6x on each. If for some crazy reason you’re thinking of selling those niche growth stocks, it’s worth waiting the extra few weeks to ensure long term cap gains incentives. 2 things to note:
The clock does NOT reset when the ticker changes
It’s worth holding even if the stock goes down little to avoid getting hit by short term cap gains
It’s time to start thinking about holding SPACs through the merger
There, I said it. I know my pitch is that you can’t lose when you buy a pre-merged SPAC near the $10/floor. (If you don’t know this by now then click the article below right away because you’re a liability).
Also part of my pitch is that a SPAC is basically Venture Capital or Private Equity: you’re in Pre-IPO (aka Pre-Merger). Remember AirBnB, Door Dash, or C3.AI stock IPOs last year? They all opened up 3-5x from what their CFOs & investment banks priced them at. With a SPAC, you’re hopefully in BEFORE it goes 3-5x.
Let’s do some timeline Math:
4.8 months (avg time of SPAC until announcement)
3 months (avg time from announced to ticker change)
Chances are you bought shares a few months before announcement so that would leave you with just weeks until that 1 year mark (save $ on cap gains taxes). Do the timeline math, it’ll keep $ in your pocket.
Recent growth companies that went public via SPAC are SKILLZ (SKLZ $39), MP Materials (MP $34), and Desktop Metals (DM $27). All of those have strong institutional backing with lockup periods & target major growth industries (gaming, lithium, 3D-printing). Have a similar thought process when considering holding through merger to reach that 1 year milestone.
Make these changes going forward
Trade Wisely – Open A Tax Free Savings Account.
You read that right, it says “TAX FREE” loud and clear. There are 2 main accounts known as Roth IRA & Traditional IRA. IRA stands for “Individual Retirement Account. This is how you effectively grow your net worth without the Government dipping their sticky ketchup fingers in your pocket.
Fortunately for me, my parents opened up a Roth Ira when I turned 18. At the time, this was the least exciting thing & I couldn’t care less. Fast forward to SPACmania, I’m beyond thankful that I can multiply this account TAX FREE. I make hundreds of trades every year & don’t get taxed on a penny of it. Trade smarter, not harder. Here are the core differences between the 2:
Taxed before you deposit into the account (regular income)
Taxed at the end when you withdraw
Both Roth IRA & Traditional IRA
Max Contribution of $6k/year, $7k if 50+ years old
Can’t touch it until you’re 59.5 years old at the earliest
10% fee (+ Cap Gains) if you withdraw early
You don’t get penalized for: First time home purchase, educational expense, medical expenses (if above 7.5% of your income), disability, birth ($5k allowed), health insurance (if unemployed for 12 weeks), army reserves (if called for 180+ days of duty), and if you die your kids can drain the account.
To sum it all up: Unlike last Saturday night, don’t pull out early. If you’re not ready to be a grown up and plan for retirement by not touching your IRA, don’t put it in there. It’s not worth your time.
Time to trim the grass
If you lost money in the stock market in the last 6 months… I don’t know what to say to you because almost everyone else made money. It might just be bad luck but fortunately, it’s not all bad news.
Before the end of 2021, revist those ‘hopeful’ stocks that will most likely never regain momentum and CUT THEM LOOSE. The reason you want to do this is to offset your capital gains by selling the losers.
I know it’s going to hurt to say goodbye because poor performing stocks become sentimental losses. Just do it, it’s worth decreasing your tax bill.
Here’s the technicalities of it:
Your poor performing stocks offset gains from sold stocks that were sold in the same year.
If you end the year with your stocks in the red, that capital loss (up to $3,000) will offset your ordinary income – and lower your tax bill.
If you bought Gamestop at $495 and your portfolio is extra bloody, you can carry any extra loss (that you sell) forward indefinitely and use it to offset future gains in later years.
Nuanced SPAC questions & details
Where was your SPAC Incorporated? I’m serious, this is going to be a bigger problem than people realized.
Some SPAC owners incorporate in tax havens like the Cayman Islands, most recently Peter Thiel’s Bridgetown Holdings II (BTNB). If they incorporated in New York City or Los Angeles, they’d get whacked with ridiculous tax consequences for a simple “shell company.” THIS IS ONLY BENEFICIAL TO THEIR OWN WALLETS.
These ‘Foreign Shell Companies’ aka ‘Foreign SPACs’ are knows as PFICs:
The reason I mention this is because a PFIC has consequences on the LITTLE GUY’S WALLET. The USA Government does not like businessmen dodging taxes by incorporating in Tax Havens. So, they have set complex laws in place to penalize these types of investments. If you invest in a foreign SPAC & it becomes designated a PFIC, you’re gonna have to deal with a major headache.
These PFIC laws are so complex I doubt even the IRS can figure them out. If you’re truly interest in deciphering the hardest maze of them all, click here for PFIC & SPAC implications.
If a WARRANT is exercised after 1yr+, does the Cap Gains clock reset?
YES, the clock is reset when exercised. The warrant is technically redeemed and the new stock is created.
If I hold my WARRANT for 1yr+ & sell it “as is,” does the Cap Gains clock reset?
NO, the warrant never changed form & is considered long term
If I split a UNIT, is the 1yr clock reset?
NO, the clock stays because it splits into the same common share & warrant that have always existed
Can I deduct fees from splitting units or exercising warrants?
YES, you can add those fees into the purchase price of your asset – meaning when you sell, the gain will be offset slightly by the fee.
Know your SPAC cost basis
Your cost basis is the price you paid for the SPAC. You pay tax on the net gain from the price. If you split your units, your brokerage may lose track of your warrant cost basis since they ‘appeared out of nowhere.’ You may not be able to figure this out to the penny but you can prevent drastic overcharge.
P.S. I’m super sorry for the boring article but I have received dozens of questions regarding SPACs & Tax. This should serve as the Advil to your tax headache.
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There’s No I In Trade
My goal is to create a community where people can educate themselves through the world of investing. I can’t do that alone, we need to build this community together. So tell me what you’re loving, tell me what you want to see more of tomorrow.