Trading LLC shares

Well, I disagree. Although your accountant probably looks at this deal as a "like-kind exchange", IRC Sec 1031(a)(2) and Reg 1.1031(a)-1 specifically excludes "security interests" and "partnership interests" from the like-kind rules. LLC ownership interests are securites and are usually partnerships. BACKGROUND: In general the like-kind exchange rules defers recognition of income until the after-acquired property is disposed of. There are some exceptions, which allow the like-kind treatment to securities and partnerships, but you have not mentioned anything to lead me to believe you are within any exception. Here are some examples of these exceptions which recast some limited security and partnership transaction as a deferred 1031 exchange ... transfer in the event of divorce, ESOP trades, conflict of interest exchanges, and a few other rare instances you have not mentioned. If you fell under the like-kind exchange rules (which you don't) gain would not be recognized or taxed until the newly acquired property is later sold or exchanged in a taxable event. Assuming you are not eligible for the like-kind exchange deferral treatment under Sec 1031, a sale or exchange, such as this, is a taxable event. Your gain is computed by deducting your BASIS (usually your COST of the item or items given up) from the AMOUNT REALIZED (usually the Cash, plus Fair Market Value (FMV) of items and the FMV of the services you'll receive in the transaction). In plain english, you have to figure what your "cost basis" is in the LLC interest you are giving up. This cost basis is usually your out-of-pocket cash paid for the interest you're giving up. This may be ZERO, if you got it in exchange for services. It is almost always the cash paid for that portion of the ownership interest being exchanged. Next figure the FMV of the item(s) being received. This is determined by what a willing buyer would pay to receive the item, with neither the buyer nor seller under any compulsion to buy or sell. Good luck with this one. Ask him what it's worth. It might just be the net worth of the company, divided by the number of Issued LLC Ownership Units, unless there is goodwill involved in an operating company with a business track record. In that case it may be a guess, or an appraisal, or it may be what he thinks is the value of your LLC Certificates (plus your cash and services given up). Also, your LLC Certificate's future value may be the Amount Realized. This makes sense, since most business transactions are done at arm's lenght for equal and just consideration. So, if your Basis is $1 and the value of the Amount Received is $10, your gain is $9. This is a short term capital gain if your LLC Certificates were held less than one year. It is Long Term Cap Gain if held more than a year. The time starts counting the day after you receive ownership of your interest ... that is day 1. Long term gains are taxed at a lower rate. In your example, the base price of $0.20 of your interest is irrelevant unless that is what you paid. Your cost is usually your basis. Additionally, his asking price for raising capital is irrelevant, unless it represents its FMV ... which it may. So, if you paid $0.20 per unit and the FMV of each of his units is $10, upon exchange, you have a gain of $9.80, short or long term, depending. This also means the FMV of your units is $10 even though your basis is only $0.20. Got it? Basis and FMV are usually never the same in the real world. If you give him $5 cash plus your $0.20 basis in your Ownership Interest, your basis is $5.20 and your gain is $4.80 if his FMV is $10. If he gives you $3 cash plus his $10 FMV in his Ownership Interest for your $0.20 basis Ownership Interest, your gain is $12.80.

That's a taxable event, in effect you're selling your shares and buying his (and vice versa).

Guessing isn't a taxable event.

Trading is selling.

There's a trick that might work to avoid that. Set up an investment partnership; each of you puts $20,000 worth of shares (at whatever value the two of you agree on) and owns

50% of the partnership. Contributing shares to a partnership in return for its shares is not a taxable event. At some time in the future, the partnership dissolves, selling the shares and giving each of you half. That's taxable, of course. (It might also be possible for it to dissolve without selling and give each of you half of each company's shares; I don't know if that would be taxable or not.) Seth

But if you got the stock in exchange for work, and paid income tax on it (or on the discounts), your basis is the amount you paid plus the amount you paid income tax on. Seth