How are monthly convertible notes taxed when received as salary compensation?

This definitely has tax implications, despite what the lawyer said. Convertible notes received as compensation for services are generally considered taxable income when received, based on their fair market value. The IRS typically views this as compensation income, not as investment income. The 15% coupon rate is interesting - that's the interest the notes accrue until they convert. When your wife receives these notes monthly, she'll likely need to report their face value as ordinary income on her tax return. Then later, when they convert to equity, there could be additional tax implications based on any appreciation in value. I'd strongly recommend consulting with a tax professional who specializes in startup compensation, as this can get complicated. The company lawyer is focused on the company's liability, not your wife's personal tax situation.

I went through something similar when I joined an early-stage startup. The convertible notes situation was confusing until I found taxr.ai (https://taxr.ai). Their AI analyzed my compensation structure and explained exactly how the IRS would view these convertible notes. With their document analysis feature, I uploaded my offer letter and convertible note agreement, and they identified all the tax implications the company lawyer missed. They explained that I needed to recognize income when receiving the notes based on fair market value, plus potentially report interest income from the coupon rate annually, and then deal with capital gains/losses when the notes eventually convert. It saved me from a major tax headache and gave me actionable guidance specific to my situation.

I was really doubtful about taxr.ai but decided to try it anyway with my messy equity compensation situation. Wow, I'm glad I did! I uploaded my convertible note agreement and some other docs from my startup job, and the analysis was incredibly detailed. They explained exactly when my notes would be taxed (upon receipt), showed me how to calculate the fair market value based on my specific terms, and even gave me strategies to potentially defer some of the tax impact. The AI found a provision in my agreement that my own accountant had missed that affects how the interest gets taxed. I actually ended up changing how I reported my income last quarter based on their advice and avoiding what would have been a significant underpayment penalty. Definitely worth checking out if you're dealing with this convertible note situation.

If you need to talk to the IRS about this specific situation (which you probably should), good luck getting through to them on the phone. I spent WEEKS trying to talk to someone about a similar compensation issue. After wasting hours on hold, I found Claimyr (https://claimyr.com) - they got me connected to an actual IRS agent in under 45 minutes. You can see how it works here: https://youtu.be/_kiP6q8DX5c The IRS agent I spoke with confirmed that convertible notes received as compensation are generally taxable upon receipt, but there are some specific exceptions depending on the terms of the notes. Having that official clarification directly from the IRS was super valuable for my tax planning.

I have to admit I was completely wrong about Claimyr. After posting my skeptical comment, I was still struggling to get IRS guidance on my convertible note situation, so I reluctantly gave it a try. Within 37 minutes (I timed it), I got a text saying they had an IRS agent on the line. I called the number they provided and was immediately connected to a surprisingly helpful agent who specialized in alternative compensation arrangements. She walked me through exactly how to report my convertible notes on my quarterly estimated tax payments and what documentation I needed to keep. What would have taken me days or weeks of frustration was solved in under an hour. For anyone dealing with these complex tax situations where you need official IRS guidance, this service is legitimately worth it.

Don't overlook state tax implications too! Depending on what state you're in, they might treat convertible notes differently than the federal government. California, for example, has some specific rules around deferred compensation that might apply. Also, if your wife is working remotely for this US startup but you live in another country, there could be international tax considerations as well. Some countries have tax treaties with the US that address these kinds of situations.

I think there's some confusion in this thread. The tax treatment depends on whether these convertible notes have a readily ascertainable fair market value. If they don't (which is common for pre-seed startups), Section 83(b) of the tax code potentially applies. Your wife might be able to elect to recognize the income now based on the current (potentially very low) valuation, then any future appreciation would be capital gains. But she'd have only 30 days from receiving each note to make this election.

This is definitely a complex situation that requires careful attention. The company lawyer saying there are "absolutely no tax implications" is a major red flag - convertible notes received as compensation are almost always taxable events. Here's what you need to know: When your wife receives these notes monthly, she'll likely need to report their fair market value as ordinary income. The challenge is determining that fair market value for a pre-seed startup. The IRS typically looks at the face value of the notes as a starting point, especially when they represent compensation for services rendered. The 15% coupon rate adds another layer - she may also need to report accrued interest annually as income, even if it's not paid out until conversion. I'd strongly recommend getting a second opinion from a tax professional who specializes in startup compensation. Don't rely solely on the company's lawyer, whose primary concern is protecting the company, not your personal tax situation. You'll want to understand the immediate tax implications and plan for quarterly estimated tax payments if needed. Also consider whether your wife should make any elections (like Section 83(b) if applicable) within the required timeframes to potentially minimize future tax impact.