Taxes on $1,000,000 lump sum?

I’ve done some searching of GQ and I don’t think this question has been asked and answered before. First, some disclaimers: yes, I know taxes are a very complicated issue. I’m looking for a rough ballpark estimate here, nothing more. It’s not like this is going to apply to me any time in the near future. This is really more idle curiosity than anything else.

With that said, here’s my question: suppose I’m an employee of a corporation of which I’m also 10% owner, and the company sells for $10M. I’m given a check for my share, $1M. How much does the federal government get and how much do I get to keep? What if my cut was $3M instead of $1M?

I believe that would be capital gains, and the tax rate depends on your tax bracket, how long you held the stock, and the initial purchase price; there is also a capital gains tax in many states. Income averaging, offsetting losses, and other games may apply.

IANAA. IANATP.

Whoops. For most people, the federal tax on $1,000,000 in windfall capital gains from long-held shares is 20%, or $200,000.

It depends on what your original investment in the company was. The check you get when the company sells is capital gain income, rather than ordinary income, and your capital gain is the difference between what you put into the company when it was started and what you got out of it when it sold. Say your original investment was $25,000. That would be what is known as your cost basis in your investment. If your share on buyout was $1M, then you would have a $975,000 capital gain. Most capital gains are currently taxed at 20%, so your tax would be be $195,000.

The above is an incredibly simplistic expanation, and does not take into account a whole host of factors, such as how your cost basis can be adjusted. If you were in fact facing the prospect of such a windfall, no doubt you would also have a good CPA to do all the figuring for you.

Upon preview, I see this has already been explained.

Since this payment was a return of an investment, capital gains tax rules would apply.

If your cost basis in the company is $0 and you have held the investment for 1 to 5 years, your tax should be at 20% or $200,000.

If you have held the investment for over 5 years, you may be eligible for a lower 18% tax rate.

The same rates applies to the $3 million.

I don’t want to hijack this thread, but it seems an appropriate place to ask the question:

What if i won a lottery that had a $1 million cash option. How much would i be taxed on this? Also, do they just give you a check for $1 million and rely on you to sort out the tax issue, or do they take out a fixed amout and call it quits?

I’m intrigued, because where i’m originally from (Australia) lump sum lottery winnings are not taxed.

Lottery winnings are ordinary income, as opposed to capital gains, and are taxed at a maximum rate of 38.6% right now.

I don’t know anyone who’s ever won big in the lottery, but I’d be VERY surprised if the Feds didn’t withold a sizable chunk of a cash option lottery prize.

If you would have entered $50,000 on line 41 of your 1992 1040, but for the lottery winning, so now you have to enter $1,050,000, and you’re single, your federal taxes go from $9853 to $381,499.

Wow.

Some multimillionaire gambles on the stock-market, makes a capital gain of a millions bucks, and get taxed 20%.

Some poor schlub earning minimum wage gambles on a lottery ticket, makes a gain of a million bucks, and gets taxed 38%.

No some rich guys invests money in a business and leaves the money there for an extended period of time creating jobs and products that people want gets taxed at 20%.

Actually, if the “rich guys” gambled on the stock market the money they put it isn’t invested in the company. It goes to the “rich guys” who previously owned the stock. The company isn’t any part of the deal.

Taxing state-run lottery winnings is just evil, anyway. It’s a tax on a tax.

David Simmons, THANK YOU!! I get so sick of tax-cut fans dragging out that BS about investment helping the economy, when most “investment” is gambling between private parties or their agents. If you want to provide jobs and promote productivity, howzabout we restrict the capital gains tax rate to shares bought directly from the company? Howzabout we tax dividends only on shares traded in the market? This would benefit entrepeneurs, employees with stock options, and people like our Original Poster, without giving a free ride to the market parasites.

I don’t know who said it first, but a lottery is a tax on people who are bad at math.

I think that’s true. But they paid the tax when they bought the ticket. I don’t think the one person who beats the odds and actually wins should be slugged to the tune of 38%.

Of course, the reason for this is that the money used to purchase a ticket is a state tax, and the feds need to get in for their share.

Good to see gazpacho perpetuating the myth of the selfless investor.

I’m not certain but I believe there generally is withholding on the larger lottery prizes.

I actually know someone who won one of those early large prizes 25 million or so. Her daughter was a year or two behind me and the son-in-law and I were in many of the same classes in high school.

If you win a million, don’t worry about the large portion the government takes. Six hundred grand is a huge amount for the average person–that’s after taxes remember–and will be difficult to spend or invest(wisely) anyway.

**No some rich guys invests money in a business and leaves the money there for an extended period of time creating jobs and products that people want gets taxed at 20%. **
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Plus the rich guy invests a lot more that a $2 lotto ticket.

Plus the rich guy invests a lot more that a $2 lotto ticket. **
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The poor guy would invest lots more in lotto tickets if he had it.

Your position is naive. There is no practical difference between the initial sale of the stock direct from the corporation and the secondary market. If that secondary market did not exist, there would be no reason for investors to make the initial investment, as it would be difficult or impossible to realize a profit. If you don’t see that then you need to give the subject a little deeper consideration than you have.

But the lottery player takes a larger risk. I don’t know the stats on business investments, but it is sure a hell of a lot better than 14 million to 1. Think of it as an investment in the state treasury and in many cases, the public education system, and a stimulus to the industries involed in lotteries, creating jobs and prosperity for all. Yes, lotteries are a good thing for the economy, so the argument to make proceeds non-taxable is just as valid as that used to justify the deceasing or removing taxes on stock dividends and capital gains.