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The Reason You Should Record Your Crowdfunding Investment Fees

Several Regulation Crowdfunding (Reg CF) funding portals, such as WeFunder and StartEngine, charge investors a fee based on the amount of each investment, while others, such as Republic and Netcapital, do not. The fee is typically around 3.5% (may have minimum and maximums, such as $8 min and $75 max on WeFunder) and is typically used to offset the cost of credit card transactions or other bank fees.

While most crowdfunding investors are tracking their investment details and due diligence notes, very few investors keep track of the investment fees that they are paying. And that’s a mistake.

Are you wondering which funding portals charge investor fees? Download our Reg CF funding portal comparison here.

Can Crowdfunding Investment Fees Reduce Taxes on Startup Investment Gains?

While each investor’s tax situation and every investment is unique, the short answer is – maybe, under certain circumstances.

First, when we say fees here, we are specifically referring to the ~3.5% processing fee that is charged every time an investor makes a startup investment on a funding portal, such as WeFunder or StartEngine. We are not referring to other fees related to your crowdfunding investments, such as time spent researching deals, dues or subscriptions to crowdfunding ratings services, or other fees not directly associated with the cost of making a specific investment.

Second, investment fees are most likely not something you can write off against your taxable income. Similar to the Commission Fees paid when trading public stocks, the startup investment fees may be included as part of the cost basis of your startup investment.

Understanding Cost Basis

The cost basis of an investment is the original value of an asset for tax purposes (including certain fees, dividends, splits, etc.), and is used for determining the capital gains or losses when that asset is sold at a later time.

Note that the definition is “the original value of an asset for tax purposes“, and not necessarily just “the original purchase price”. What’s the difference?

Imagine you purchase stock of XYZ company at $100. You later sell that stock for $110. In this case, $100 is the cost basis, and $110 is the sales price, so you have a realized capital gain of $10, which you would pay taxes on.

In the above example, assume that your brokerage charges you $1 in commissions to buy the stock and another $1 to sell the stock. In this case, you can include the $2 in commissions as part of the cost basis. Thus, your overall cost basis is actually $102, meaning your taxable gains are now only $110-$102 = $8. You will owe a reduced amount in taxes on the adjusted gains.

In a similar fashion, most startup investors can likely include investment fees as part of the cost basis of their crowdfunding investments, which can help to reduce future tax liabilities. 

Assume you invest $300 in Startup ABC on WeFunder. WeFunder charges a 3.5% fee ($8 min / $75 max). Thus, you would pay $10.50 in fees.

If your startup then has an exit event in the future, you can use the cost basis of $310.50 instead of $300 when calculating your tax liabilities, which can help reduce your overall tax burden.

Taxes are especially complex in early-stage investing and will depend on many factors including holding period, security type, and details of the business (which may be able to qualify you for 0% in taxes owed), so always consult with a tax adviser or accountant for your personal situation.

Potential Tax Savings from Crowdfunding Fees

Now that we’ve seen how investment fees may reduce an investor’s overall tax burden, let’s quickly estimate how much a typical crowdfunding investor can expect to save in taxes by tracking investment fees across a startup portfolio.

First, let’s assume an investor has a $300,000 net worth and is aiming to invest $5,000 a year in startups to build a portfolio of 50 startups by year three ($15,000 total would be 5% allocated to startups based on this investor’s net worth).

Since $15,000 spread across 50 startups would be $300 per deal, at 3.5% fees per deal, it would be a total of $10.50 in fees per deal, or $525 total in fees.

Next, let’s estimate the total startup portfolio returns. Based on historical angel investing returns, we will assume the mean return of 26% IRR over a seven year holding period. Using our portfolio returns calculator, this would result in an overall startup portfolio return of 5.04X, meaning our $15,000 investment would be worth $75,600 seven years later.

Lastly, assume that we don’t take advantage of any other tax deductions for startup investors and that we aren’t investing through a retirement account. We would have to pay taxes on $75,600 – $15,000 = $60,600 in gains. At a long term capital gains rate of 15%, we’d owe $9,090 in taxes.

Let’s now assume that we include the $525 in fees. The new cost basis would be $15,525, with total gains being reduced to $60,075. At the same 15% long term capital gains rate, we would now owe $9,011.25

Don’t Leave Any Free Money on the Table

To some investors, the difference of only ~$79 (about 1%) in savings in the above example might not seem like it’s worth your time. For investors who are getting charged the $8 minimum, though, it will be a larger percentage. And for investors who are investing larger sums of money, 1% savings in taxes could be a sizeable amount.

Personally, I don’t like leaving any money on the table. The effort to record the fee at the time of purchase is negligible for me (or to go back now when it’s still early and retroactively record all the fees). If those savings resulted in me adding one more company to my portfolio, and that company became the one that resulted in home run power law returns, then it was entirely worth it.

The only tricky part is figuring out what the best system is for keeping this information, whether that’s in a spreadsheet or in an investing app.

How to Track Crowdfunding Fees – VentureWallet

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To help with tracking key tax details (like investment fees) along with due diligence notes, valuations, and more, we created a portfolio management tool called VentureWallet.

VentureWallet allows you to track all your investments across the different funding portals and gain key insights into portfolio valuations, trends, industry exposure, and more.

Head over to VentureWallet to create your free account and get started today.

 

Disclaimer: this article is for informational purposes only. Nothing should be construed as legal, tax, or investment advice. Always consult with your professional tax, legal, or investment advisor.

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