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May 11, 2012 - Phil Hodgen

Why the Facebook dude expatriated

You’ve seen the articles.  Heard the rants on TV.  Seen my prior blog post.

Now here is the economic reason he gave up his U.S. citizenship last September, pre-IPO.

How he was taxed when he gave up citizenship

When you give up your citizenship, the IRS pretends that you sold everything the day before.  Let’s pretend Eduardo Saverin cancelled his citizenship on September 30, 2011.  That means the IRS pretended he sold everything he had on September 29, 2011.

Among other things he owned was a giant stack of Facebook stock.  Eduardo’s tax lawyer (if smart) went and bought a really expensive valuation opinion on what the stock was worth on that date.  Eduardo acquired the stock at as close to zero as you can be.  So the entire amount was capital gain.

Example.  Eduardo owned 100 shares of Facebook stock that he bought for $100 at founding.  On the day before he expatriated his stock was worth $1,000.  He has a really well-documented valuation opinion to prove it.  (Remember, at this point Facebook is pre-IPO.  There was a secondary market for this stuff so it’s reasonably easy to get reasonably close to what the stock was worth).

Eduardo has capital gain of $900.  He happily pays tax to the U.S. government on that $900 capital gain.

How he’s taxed after he gives up citizenship

Now Facebook goes all IPO ‘n stuff.  His 100 shares are suddenly worth $2,000.  Remember.  Eduardo is a nonresident alien — a noncitizen of the United States who also happens to not be living in the United States.  He sells the stock for $2,000.  He pays U.S. capital gain tax of ZERO.

Whaaaaaa?

Or as Reddit would say, ffffffffuuuuuuuuuuuuu!

Yep.  True story.  Zero tax in the USA.

A nonresident alien does not pay capital gain tax on stock sales of U.S. companies.  Not just Facebook.  It could be Google, Apple, anything.  Nonresident investors do not pay capital gain tax on their stock sales.  (Usual disclaimer – exceptions to the rule exist everywhere but for the well advised investor this is the result).

Example:  Eduardo owned 100 shares of Facebook stock that he bought for $100 at founding.  He cancels his citizenship and pays his $900 tax as described above.  The company goes IPO.  Now the stock is worth $500 per share.  His holdings are worth $50,000.  He sells.  Pays no capital gain tax.

This means that the total capital gain tax that he paid, as a founder of Facebook, was $900.

And if the price per share goes to $1,000, he has $100,000 in his pocket, on which he paid tax of $900.

Etc.

I don’t know the true numbers

I don’t know the true numbers that apply to him.  But that’s the tax game he played.  He only gets taxed on the capital gain up to the value of the stock on the day before he expatriated.  All future appreciation in value is forever tax-free to him.

I approve.

EDIT:  I’m quoted in an article on abc.com about this situation.

Expatriation