Paying Taxes on the Honor System

[Route246]

Background: 18 years ago I took a side consulting job with my old manager who was running a startup. It was a courtesy on my part out of loyalty and I helped to bring their computing infrastructure up to speed. He asked me what my rate was and I told him I don't have a rate and it is OK if he paid me in stock. He said the venture is way too risky and will probably fail and he didn't want me to sacrifice so much time so he paid me 50-50 cash and stock and I gave him a discount of $100/hour. Usual rate at the time for what I was asked to do was about $150/hour or higher. I consulted for four years and yielded about 80K, 50% in startup stock valued at $0.005 or thereabouts so total $40K basis.

Today, the stock is publicly traded at an offshore Mega-exchange and I was able to sell 20% valued at about US$160K. The sale went through a few months ago and an offshore wire showed up a few days ago for $US$139.4K after foreign fees and foreign taxes. I don't have details but these taxes were not capital gains taxes, they were stock exchange taxes and fees as best I can tell.

I asked my CPA a few days ago what to do. Of course, he can't tell me to do anything nefarious or illegal and we laughed about that. He said there are a few things I need to determine like how much of it is a gift, if any, what are the expenses, fees and taxes associated with the exchange and that my basis will probably be $139.4K. This is an international wire that just shows up in my checking account. Our checking accounts at this bank have over $300K in them (my wife's preference, not mine) so it is not even 50% of our cash.

I then asked, "What if I do nothing and wait?" He said he can't answer that question because it is on the line between negligence and fraud, etc. He did say it would have to be caught in an audit and will not be reported.

If I had nothing to lose I would probably do nothing and wait and hope the statute of limitations expires. But 2025 is a huge capital gains income year for us so the likelihood of audit is a smidge higher. I'm trying to get details from the offshore headquarters regarding documentation (I have none now). I really hate to just declare income and make a mistake, either underreporting or overreporting, etc.

My wife and I have been talking about this for those 18 years. We always considered it $0 and worthless. Once, about ten years ago I was offered a buyout of $42K (the value assessed at the time) prior to the stock being transferred overseas in order to prepare for IPO. I asked my wife do you want me to collect the $42K in hand or let it ride? She said let it ride so I did. Eight years later with a valuation of $800K, 20% showed up in our bank. Like money falling from the sky I told her.

Once I hear back from the overseas HQ of the company I plan to "disclose" this income with no 1099 and probably no documentation. I just don't want any trouble later. I'm wondering what others would do when the temptation is to do nothing and wait and hope the statute of limitations runs. For me, I'm at the point in life where I don't need those headaches.

 

[FLSUnFIRE]

If you always considered it worthless, even paying taxes on it would still be a windfall and easy to sleep without keeping an eye open. Small transactions without a 1099 that are missed is one thing but hard to play dumb at that magnitude. It would give me too much anxiety to try to get away with it.

 

[Koolau]

Background: 18 years ago I took a side consulting job with my old manager who was running a startup. It was a courtesy on my part out of loyalty and I helped to bring their computing infrastructure up to speed. He asked me what my rate was and I told him I don't have a rate and it is OK if he paid me in stock. He said the venture is way too risky and will probably fail and he didn't want me to sacrifice so much time so he paid me 50-50 cash and stock and I gave him a discount of $100/hour. Usual rate at the time for what I was asked to do was about $150/hour or higher. I consulted for four years and yielded about 80K, 50% in startup stock valued at $0.005 or thereabouts so total $40K basis.

Today, the stock is publicly traded at an offshore Mega-exchange and I was able to sell 20% valued at about US$160K. The sale went through a few months ago and an offshore wire showed up a few days ago for $US$139.4K after foreign fees and foreign taxes. I don't have details but these taxes were not capital gains taxes, they were stock exchange taxes and fees as best I can tell.

I asked my CPA a few days ago what to do. Of course, he can't tell me to do anything nefarious or illegal and we laughed about that. He said there are a few things I need to determine like how much of it is a gift, if any, what are the expenses, fees and taxes associated with the exchange and that my basis will probably be $139.4K. This is an international wire that just shows up in my checking account. Our checking accounts at this bank have over $300K in them (my wife's preference, not mine) so it is not even 50% of our cash.

I then asked, "What if I do nothing and wait?" He said he can't answer that question because it is on the line between negligence and fraud, etc. He did say it would have to be caught in an audit and will not be reported.

If I had nothing to lose I would probably do nothing and wait and hope the statute of limitations expires. But 2025 is a huge capital gains income year for us so the likelihood of audit is a smidge higher. I'm trying to get details from the offshore headquarters regarding documentation (I have none now). I really hate to just declare income and make a mistake, either underreporting or overreporting, etc.

My wife and I have been talking about this for those 18 years. We always considered it $0 and worthless. Once, about ten years ago I was offered a buyout of $42K (the value assessed at the time) prior to the stock being transferred overseas in order to prepare for IPO. I asked my wife do you want me to collect the $42K in hand or let it ride? She said let it ride so I did. Eight years later with a valuation of $800K, 20% showed up in our bank. Like money falling from the sky I told her.

Once I hear back from the overseas HQ of the company I plan to "disclose" this income with no 1099 and probably no documentation. I just don't want any trouble later. I'm wondering what others would do when the temptation is to do nothing and wait and hope the statute of limitations runs. For me, I'm at the point in life where I don't need those headaches.

Do the best you can to report the income. The worst IRS could do is to dispute it and ask for documentation. Then it's down to letter writing giving the narrative you've provided here, I'd think.

Likely the IRS will think "What honest guy would submit this income and the tax and under-report it when he could have stiffed us for the whole thing."

 

[GrayHare]

"I mean, if we go down to this park and we uncover the money and we have it, I mean, I'm sure he's not gonna declare anything, I know he's not gonna declare anything... and I'm not gonna declare..."
"What are you talking about, declare it?"

FWIW, I'd declare it.

 

[Koolau]

"I mean, if we go down to this park and we uncover the money and we have it, I mean, I'm sure he's not gonna declare anything, I know he's not gonna declare anything... and I'm not gonna declare..."
"What are you talking about, declare it?"

FWIW, I'd declare it.

One of the best movies of all time.

The Big W was eventually removed IIRC.

 

[junkanoo]

I would absolutely put this income on my tax return.

Candidly, I would ensure my basis was based on your best rate at the time, not some discount rate.

Obviously, I would also deduct the foreign fees and foreign taxes.

And I would sleep better than a baby.

 

[cathy63]

my basis will probably be $139.4K

That is flat-out wrong. I hope you misunderstood him or just have a typo there.

Your basis should be the fair market value on the date you received it. You received stock in exchange for your labor, so it was compensation, not a gift. You probably should have paid some tax when the stock was received but that depends on whether these shares were issued as ISOs or NQSOs or as ordinary shares. In any case, it sounds like it was long enough ago that the IRS is past caring about how you acquired it and what should have happened then. However, if you think the total stock award was worth $40K at the time got it and you just sold 20% of it, then your basis in the shares you sold is $8K.

Your long term cap gain is $160K - $8K = $152K. From that you can subtract your selling expenses. You would report the foreign tax paid on Form 1116 or Schedule A.

 

[Aerides]

If I were considering not declaring it even with 1% of my thoughts, I would not create a thread on the internet asking about it.

So, you will be declaring it, and finding the best way to do so with as much documentation as you can.

 

[MarieIG]

I am very boring. I would just follow the letter of the law, vis-a-vis tax payments.

 

[pb4uski]

That is flat-out wrong. I hope you misunderstood him or just have a typo there.

Your basis should be the fair market value on the date you received it. You received stock in exchange for your labor, so it was compensation, not a gift. You probably should have paid some tax when the stock was received but that depends on whether these shares were issued as ISOs or NQSOs or as ordinary shares. In any case, it sounds like it was long enough ago that the IRS is past caring about how you acquired it and what should have happened then. However, if you think the total stock award was worth $40K at the time got it and you just sold 20% of it, then your basis in the shares you sold is $8K.

Your long term cap gain is $160K - $8K = $152K. From that you can subtract your selling expenses. You would report the foreign tax paid on Form 1116 or Schedule A.

I pretty much agree but I don't follow the $8k part. I presume that the OP did not declare any income when he received the stock, presumably because its value when received was $0 given the uncertainty associated with the stock received, So I would think that his entre proceeds, net of relevant fees, would be totally LTCG.

OP, do you expect to receive a 1099-B or some similar tax reporting for the sale?

 

[Koolau]

I am very boring. I would just follow the letter of the law, vis-a-vis tax payments.

I agree, but it seems the CPA isn't 100% certain of every aspect. He may need further clarification AND any possible documentation - if it exists.

So letter or the law may not be clear which is why I'd at least make a good faith effort to pay the taxes I THINK I owed. The IRS will definitely let you know if they disagree. They might even levy a penalty, but they almost certainly would not suggest fraud.

All the best. Let us know what happens.

 

[cathy63]

I pretty much agree but I don't follow the $8k part. I presume that the OP did not declare any income when he received the stock, presumably because its value when received was $0 given the uncertainty associated with the stock received, So I would think that his entre proceeds, net of relevant fees, would be totally LTCG.

OP, do you expect to receive a 1099-B or some similar tax reporting for the sale?

He said "I consulted for four years and yielded about 80K, 50% in startup stock valued at $0.005 or thereabouts so total $40K basis." He also said he sold 20% of the shares, so 20% of $40K is $8K.

Not having paid tax on income he received 18 years ago is past the statute of limitations, so I don't think that's going to be a problem. This is an uncovered sale of a capital asset that was held for a long time. They're definitely going to believe he has an $8K basis if he puts that on his tax return.

The bigger issue could be that he probably hasn't been filing FBARs.

 

[HI Bill]

The bank reports any transactions over $10K to the IRS. Given the offshore source, it seems most prudent to declare the income.

 

[mrfeh]

I would pay the CG tax.

Anything else is fraudulent, and more importantly, dishonest.

 

[COcheesehead]

I sold my business. 100% private sale of stock from me to three other individuals. The IRS would have almost no way to trace it other than bank deposits. I reported the income, paid the taxes on it and never thought of doing anything else. It was 7 figures.

 

[Koolau]

I would pay the CG tax.

Anything else is fraudulent, and more importantly, dishonest.

IOW just plain "wrong."

 

[NeilDH]

Way too much in gains to risk not reporting it. Sure, it seems unlikely the IRS will catch you, but if it does, criminal charges are possible (plus of course the IRS penalties). As per tax preparer ethical obligations, your CPA really should disassociate from you if you don’t report it. I trust all that Cathy73 says above.

 

[HarveyS]

From the OP: "What if I do nothing and wait?" He said he can't answer that question because it is on the line between negligence and fraud, etc. He did say it would have to be caught in an audit and will not be reorpted

Incorrect answer.

Time for a new CPA.

Correct answer: That would be fraudulent. If you'd like to go down that path, find a crook to do your taxes.

 

[FLSUnFIRE]

If I were considering not declaring it even with 1% of my thoughts, I would not create a thread on the internet asking about it.

So, you will be declaring it, and finding the best way to do so with as much documentation as you can.

I'm often shocked by some questions (and especially bragging about cheating with "tax-free" cash, etc) on the internet. Probably would only be found in discovery* in cases of large magnitudes but still. Court will be much more lenient in their decisions if they think you were ignorant than if they know you weighed the odds of getting caught and went for it!

*With AI agents becoming more ubiquitous and available to do the grunt work I think more and more of these will be found going forward. I could certainly be doxed from my posts if someone wanted to add up all the clues here and elsewhere publicly available. Even my photo is on here somewhere!

 

[teejayevans]

I would think an international wire of that amount would trigger at least a computer to do something.

 

[EastWest Gal]

Do your best to figure out the actual capital gain, and pay the tax. Anything else is dishonest and not legal.

 

[RetiredHappy]

I sold my business. 100% private sale of stock from me to three other individuals. The IRS would have almost no way to trace it other than bank deposits. I reported the income, paid the taxes on it and never thought of doing anything else. It was 7 figures.

Similarly with my foreign property. Acquired many years before I moved to the states. Reported the 7 figure sale and paid several hundreds of thousands in capital gains, plus pure income tax in CA.

 

[skipro33]

Bottom line: this is a straightforward long-term capital gain with foreign tax credits and selling expenses reducing the bill.

 

[Dash man]

Pay the tax on whatever you’ve received. If you end up in jail, you may not be able to access this forum! 🫩

 

[CalBird]

The OP is probably more concerned about reporting income without supporting documents especially foreign income. If you report, you are at the mercy of IRS to believe you are honest. You don’t want to do anything illegal, but dealing with IRS is not something you would enjoy especially if you can’t prove yourself.