So my friend has a company that seeks investments from friends and family (possibly other acquaintances too). They invest these funds into stocks, etfs, derivatives, etc using their patented algorithms and constantly learning more. Let's say they guarantee a 10% return per year. (I asked and they said they tested their algorithms over years with dummy transactions and even in the last 2 years with actual money and they make more than 10%).

So, assuming they know and can deliver, they'll need to send me some forms for taxes. (He said it will be treated as a Capital Injection.)

From my side, if I invest $10000 and hold the stock for more than a year, will I be taxed Long Term Capital Gain rate on the yield ($1000) or will it be short term gain/ordinary income? How can I optimize taxes in this investment?

To clarify based on comments: what questions could I ask to better understand the structure of the fund from my perspective of getting taxed? (I thought, from my perspective, what the company does and invests in would be opaque to me. I'd be getting some returns at the end of some period.)

The company is based out of Puerto Rico and I am based out of California, United States.

EDIT: Clarifications based on comments The friend is a dear friend of my wife. He is a PhD in Chemical Engg with special interest in Quant/Algorithms. His continued ambition is to fund the startup space in Puerto Rico. As such, he is not shady/sneaky and we didn't just stumble upon him. I am wary of guarantees of this sort too. So I asked him point blank "how can you guarantee me any percentage if you are investing in the stock market and derivatives?" He showed me historical performance charts, the performance of his modified approach when the stock market was crashing during early Covid-19 phase. He said that the 10% is because he has consistently generated approx 30%. So my question is with the assumption that his character is not in question. Would I be getting a 1099B with a bunch of short term cap gains or can the tax doc bunch up the total gain after 1 year as a long term gain?

  • It would depend on the structure of the fund, most arrangements like this are LPs so you’d probably have a ton of short term transactions. – quid Mar 26 at 4:20
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    How well do you know this friend? While 10% a year isn't outrageous, the fact that the contract guarantees it could be a concern. – mhoran_psprep Mar 26 at 10:05
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    It won't matter, because unfortunately all your money will be gone in a few weeks. – Fattie Mar 26 at 10:38
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    If they "guarantee a 10% return per year", they are very suspicious, at least to say. – glglgl Mar 26 at 12:01
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    Run Forrest, run !!! – Bob Baerker Mar 26 at 13:21

if I invest $10000 and hold the stock for more than a year, will I be taxed Long Term Capital Gain rate on the yield ($1000) or will it be short term gain/ordinary income?

Depends on exactly how the deal is structured. If you buy an actual share in the company, there are no taxes due until you sell your share again. If they invest your money on your behalf, taxes are due whenever a gain gets generated (either by selling assets or when dividend or interest payments are coming in).

Let's say they guarantee a 10% return per yea

No they don't. No one guarantees 10%/year. If they actually do, they are either incompetent or criminal. This sounds extremely fishy and is most likely a sure way to loose all your money. I would highly recommend against investing there.

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    They can guarantee 10%/year and then go out of business leaving you with nothing. – user253751 Mar 26 at 13:11

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