Partial Sale of Private (Foreign) Company Stock

Question

My wife worked for a privately held startup that allowed her to own equity in the company in two ways:

1. She was granted options when she was hired
2. She was allowed the opportunity to buy additional stock (we did)

She worked at the company long enough for the options to expire, and we purchased them at that point since the company had gone up in value.

In 2017 there was a liquidity event, and we sold all the shares we were allowed to sell.

Here is what may (or may not) be a wrinkle: the company is Canadian and the shares were priced and sold in Canadian dollars.

(the following are all made-up numbers to hopefully make this simpler)

We bought 2000 shares via exercising options at $1 Canadian per share. Call these Class A shares. We bought 1000 shares as a straight purchase at $2 Canadian per share. Call these Class B shares.

I know the total purchase price for each transaction in US dollars. Sadly (for us), the Canadian dollar was nearly at parity with the US dollar at the time of purchase. So let's call each of the above transactions $2000, or $4000 total US.

The liquidity event did not buy up all of our shares. We were able to sell 525 Class A Shares and 275 Class B Shares, each at $3 Canadian. So $1575 and $825. However, at the time of sale, the Canadian dollar was much weaker than the US dollar, at roughly $0.7 CAN vs. $1.0 US. So in US dollars, the totals were $1102.50 and $577.50.

Finally, there was a jaw-dropping transaction fee of 4% on the sale. Seemed insane to me at the time but we were not given any alternative.

In order to report the stock sale gains, do I just convert everything to US dollars based on what I actually paid and received?

Based on this, I would report:

1. Class A: $525 cost basis.  $1102.50 - $44.10 commission = $1058.40 proceeds = $533.40 profit
2. Class B: $275 cost basis.  $577.50 - $23.10 commission = $554.40 proceeds = $4.40 profit.

Is this the correct way to calculate gains? Convert everything to US dollars and calculate profits based on the number of shares sold and their original (US) cost?

Answer 1

Your understanding for calculation is correct. You convert the cost basis with the fx rate of the award date. And the fx rate for sales proceed you get it as of the trading date.

When you buy and sell stock, your profits are subject to capital gains tax. The Internal Revenue Service doesn't define profit as the difference between your buying price and your selling price, though. Your profit is calculated based on your net price, so if you buy stock for $2,000 and sell it for $3,000, but pay separate $50 commissions for both the purchase and the sale, your taxable profit is $900. Reducing your profit by $100 reduces your total capital gains tax liability.

Important to note here is the gain should be translated to US Dollar as per the sources suggested by IRS. You can find them here.

Last bot not the least, if your plan administrator is advance enough, then you should be able to set your preferred currency for the year end statement. You can straight way report the gains shown in the year end statement in USD.