We did file within the 30-day window! Our lawyers were really strict about that deadline. We didn't have any external investors at the exact time we incorporated and issued the initial shares. We did have some friends/family invest about 3 months later at a slightly higher valuation though. Would the IRS look at that later valuation and try to apply it retroactively to our founder share purchases?

Good that you filed within the 30-day window - that's a common mistake that can't be fixed later. The IRS generally wouldn't apply a later valuation retroactively if there was a legitimate basis for the initial valuation. At formation, with no product, revenue, or investment, valuing common shares at just above par value is typically reasonable. The key is whether there were any substantive negotiations or commitments from investors already in place when you incorporated, which might suggest a higher valuation already existed. The 3-month gap before your friends/family round provides decent separation, and startups often see legitimate value creation in those early months that justifies a higher valuation. Just make sure you have documentation of the company's state at incorporation versus 3 months later to show real progress that warranted the increase.

I've seen it happen. Friend was audited last year and the IRS specifically questioned the valuation used for their founder shares. They had purchased at $.001 but had term sheets from investors at $.08 in progress when they did it. IRS argued they'd undervalued by millions and owed taxes on the difference. Huge mess.

Can you still make that election now? Or was that something that had to be done on the 2020 return?

Unfortunately, the election to report the full amount in the first year had to be made on your original 2020 tax return. Since you already reported only 1/3 of the distribution as taxable in 2020, you're now locked into the three-year reporting method. The only way to change this would be to file an amended 2020 return (Form 1040-X), but that has risks and costs that likely outweigh any potential benefits at this point. You'd pay interest and possibly penalties on any additional tax from reporting the full amount in 2020, plus you'd draw additional scrutiny to your return.

You can repay a CARES Act distribution within 3 years of the date you received it to avoid taxes on the repaid amount. So if you took it out in July 2020, you have until July 2023 to put it back. You'll need to file amended returns to get back any taxes you already paid on the portions reported in 2020 and 2021.

That's a good point about the tax rates! All my trades this year have been held less than a year, so I know I'm stuck with the higher short-term rates this time. Do you have any suggestions for tax planning with my current situation? Is there anything I should be doing before year-end to optimize my tax situation?

For your current situation, you might want to review your portfolio for any losing positions that you're not confident about anymore. Selling those before December 31st would allow you to harvest those losses to offset some of your gains. Just be careful of the wash sale rule - don't buy back the same or substantially identical securities within 30 days. Also, make sure you're setting aside enough for estimated tax payments. With $66,800 in gains, you could be looking at a significant tax bill, and if you haven't been making quarterly estimated payments, you might face underpayment penalties. Some people are surprised when they realize capital gains don't have automatic withholding like paychecks do.

This is mostly right but some brokers' 1099-Bs can still be confusing. My Etrade one last year showed the wash sales but didn't explain how they affected my final numbers. Had to spend hours figuring out what was happening.

The calculation works the same way for SEP IRAs. Your basis is still the total of your non-deductible contributions. The difference is that most SEP IRA contributions are made by employers and are always pre-tax, so they don't create basis. If you made additional non-deductible contributions to your SEP IRA (uncommon but possible), only those would count toward your basis. Most people with only employer-funded SEP IRAs have a basis of $0, meaning the full conversion is taxable.

Thanks for clearing that up! My SEP was entirely funded through my self-employment business, and I always took the deduction for those contributions. Sounds like my basis really is $0 then, which explains why TurboTax is calculating tax on the full conversion amount.

Oh no, this sounds complicated! I do have another traditional IRA that I didn't convert. Does this mean I need to include that one in my calculations too? My tax software didn't ask about my other accounts at all!

Yes, you absolutely need to include your other Traditional IRA in the calculation! This is a common mistake that many tax software programs don't properly warn you about. When you complete Form 8606, you'll need to report the December 31st fair market value of ALL your IRA accounts (traditional, SEP, and SIMPLE) on line 6, not just the one you converted. This changes the pro-rata calculation of how much of your conversion is taxable. Definitely go back and check this in your tax software - there should be a place to enter the total value of all your IRAs, even the ones you didn't touch for the conversion.

Yikes, I'm so sorry you went through that! Thanks for the warning - this is exactly the kind of situation I'm trying to avoid. I'm definitely going to verify active licensure before moving forward. Did you end up finding a legitimate CPA after that experience?

Yes, we eventually found a great CPA through my coworker who's been using him for years. The difference was night and day - our new CPA provided all his credentials upfront without being asked and even showed us his professional liability insurance certificate. One tip: when we interviewed him, he asked US detailed questions about our situation rather than making generic promises about maximizing refunds. That level of detailed interest was a good sign he actually knew what he was doing. He also explained exactly why the previous deductions were improper and helped us file amendments. Good luck with your search!

This is a really good point. Government websites are notoriously outdated sometimes. I'd definitely ask them about it - their response will tell you a lot about how they handle client concerns.