are exchange redemptions taxable
To qualify for sale or exchange treatment, a stock redemption generally must result in a substantial reduction in a shareholder’s ownership interest in the corporation.In the absence of this reduction in ownership interest, the redemption proceeds are taxed as dividend income. The former shareholder has no interest, other than that of a creditor, in the corporation for at least 10 years after the redemption (including an interest as an officer, director, or employee). When you sell or exchange your mutual fund shares, or if they are redeemed (a redemption), you will generally have a taxable gain or a deductible loss. This also applies to shares of a tax-exempt mutual fund. Sales, exchanges, and redemptions are all treated as sales of capital assets.The amount of the gain or loss is the difference between your adjusted basis (defined earlier) in the shares and the amount you realize from the sale, exchange, or redemption.ou can figure your gain or loss using a cost basis only if you did not previously use an average basis for a sale, exchange, or redemption of other shares in the same mutual fund. To figure cost basis, you can choose one of the following methods. 1  Specific share identification. 2  First-in first-out (FIFO). While an analysis of the tax consequences of a redemption to the shareholder usually begins with whether the transaction qualifies for sale or exchange treatment, another starting point is whether the S corporation has accumulated earnings and profits (AE&P).s illustrated by the following example, the tax consequences of a noncapital gain redemption to an S corporation shareholder can be more advantageous than capital gain treatment because the shareholder may be able to recover stock basis without any capital gain recognition. While an analysis of the tax consequences of a redemption to the shareholder usually begins with whether the transaction qualifies for sale or exchange treatment, another starting point is whether the S corporation has accumulated earnings and profits.1  Column.s illustrated by the following example, the tax consequences of a noncapital gain redemption to an S corporation shareholder can be more advantageous than capital gain treatment because the shareholder may be able to recover stock basis without any capital gain recognition. A stock redemption that terminates a shareholder’s entire stock ownership in a corporation will qualify for sale or exchange treatment under § 302(b)(3). The attribution rules generally apply in determining whether the shareholder’s stock ownership has been completely terminated. The former shareholder has no interest, other than that of a creditor, in the corporation for at least 10 years after the redemption (including an interest as an officer, director, or employee). Recordkeeping. When there is a sale, exchange, or redemption of your shares in a fund, keep the confirmation statement you receive. The statement shows the price you received for the shares and other information you need to report gain or loss on your return.ou can figure your gain or loss using a cost basis only if you did not previously use an average basis for a sale, exchange, or redemption of other shares in the same mutual fund. To figure cost basis, you can choose one of the following methods. 1  Specific share identification. 2  First-in first-out (FIFO). A redemption of stock by a corporation can be treated as a distribution in part or full payment in exchange for the stock (i.e., a sale or exchange) and gains or losses to stockholders from such redemptions will be capital gains or losses, rather than distributions under.ynopsis-effect of liquidations on shareholders A complete liquidating distribution is treated as a payment in exchange for stock (Code Sec. 331(a)). Generally, therefore, the redemption of stock by a dissolving corporation results in a capital gain or loss to the shareholders. Sale Versus Distribution. If a redemption is made by a C corporation, the selling shareholder generally prefers the “sale or exchange” tax treatment noted above. If the redemption is treated as a “distribution” in such case, none of the redemption price is allowed to be offset by the shareholder’s basis in his stock.n conclusion, whenever an S corporation is considering a purchase of its shares from a shareholder, it is important to be mindful of the redemption rules in the IRC to determine how the transaction should be treated for tax purposes by the selling shareholder and the resulting impact on the S corporation. . . [an] S corporation” under Sec. 1411(c)(4). Most practitioners would consider a redemption, no matter how effected, to be a disposition of the stock. On the other hand, it is possible that the deemed sale rule applies only to a redemption that qualifies for sale or exchange treatment under Sec. 302(b) or 303.s illustrated by the following example, the tax consequences of a noncapital gain redemption to an S corporation shareholder can be more advantageous than capital gain treatment because the shareholder may be able to recover stock basis without any capital gain recognition. (a) General rule. If a corporation redeems its stock (within the meaning of section 317 (b)), and if paragraph (1), (2), (3), (4), or (5) of subsection (b) applies, such redemption shall be treated as a distribution in part or full payment in exchange for the stock.(b) Redemptions treated as exchanges.a) General rule. If a corporation redeems its stock (within the meaning of section 317 (b)), and if paragraph (1), (2), (3), (4), or (5) of subsection (b) applies, such redemption shall be treated as a distribution in part or full payment in exchange for the stock.
Yes