Forbes has published an article, “Money Now, Taxes Later With Prepaid Forward Contracts”, which discusses variable contracts and tax laws with regards to both loans and sales. The article begins as follows:
If your uncle, best friend or bank loans you money, is it taxable? Nope, not if it’s a real loan. But the loan or income distinction lands many people in trouble with the IRS. Besides, interest rates on risky loans like litigation funding and pre-IPO stock are high, and you might not be able to deduct the interest. Even worse, if a loan is forgiven—even a nonrecourse loan—it is cancellation of debt income (COD). The tax code says not having to pay back a loan is just like cash. How about a sale? If you receive money for selling your stock or assigning half of your expected lawsuit recovery, it is income. Can you get money up front that is not a loan, but that also isn’t income when you receive it? The answer to this riddle is yes, with a variable prepaid forward contract. Because the transaction is a sale, you might assume it is taxed now.
Click here to see the full article: “Money Now, Taxes Later With Prepaid Forward Contracts”
Posted by Marin Larkin, Associate Editor, Wealth Strategies Journal.