Cost basis and holding period after a secondary purchase

A simple definition

Cost basis is what you paid for an asset, for tax purposes. For shares, it's the purchase price plus certain costs of acquiring them. When you sell, the difference between your proceeds and your basis is your capital gain or loss. Basis is the number that keeps you from being taxed on money you merely got back.

Why cost basis matters

If you buy 1,000 shares at $40 and sell them at $60, your gain is $20,000, not $60,000. The $40,000 of basis is your own capital returning to you. Report basis wrong, or fail to document it, and the error runs straight through to your tax bill: understated basis means overstated gain and overpaid tax. For private shares, where there's no broker sending a Form 1099-B with basis pre-filled, the burden of getting the number right is entirely yours.

Purchase price

Start with what you paid per share, multiplied by the number of shares. In a secondary transaction, that's the price in your share purchase agreement, which may differ from the company's last primary round price or its 409A valuation. Your basis is your price, not the company's.

Additional costs

Commissions, brokerage fees, and transaction costs paid to acquire the shares are generally added to basis. Legal fees directly tied to the purchase may also qualify. Costs that aren't part of the acquisition, like an annual custodian fee or a subscription to a data service, generally are not. The result is your adjusted basis: purchase price plus qualifying acquisition costs.

Worked example: 2,000 shares at $25 is $50,000. A $1,500 platform transaction fee brings adjusted basis to $51,500, or $25.75 per share. Sell later at $40 and the taxable gain is $28,500, not $30,000.

Basis through an SPV

If you invested through a special purpose vehicle, you don't own the shares; you own an interest in the vehicle. Your basis is in that interest, and it starts with your capital contribution, including your share of any fees the SPV charged at formation. Over the life of the vehicle, your basis adjusts for your allocated share of the SPV's income, deductions, and distributions, which you'll see on the Schedule K-1 the SPV issues each year. When the SPV sells the underlying shares and distributes proceeds, your gain is measured against your adjusted basis in the interest. Keep every K-1; reconstructing basis without them is painful.

When the holding period starts

The holding period generally begins the day after you acquire the shares and ends on the day you sell them. For securities, the IRS treats the trade date as the acquisition date. In a private secondary, "trade date" isn't always obvious: the purchase agreement may be signed weeks before the issuer approves the transfer and the transfer agent records you as owner. Confirm how your transaction documents define the acquisition date, and keep the settlement confirmation that shows when the transfer was recorded. That date is the one you'll need to defend.

Short-term vs. long-term

Shares held for one year or less produce short-term gain or loss. Shares held for more than one year produce long-term gain or loss. The line is "more than one year," which means the day after the one-year anniversary of acquisition, not the anniversary itself.

Long-term capital gains treatment

Long-term capital gains are taxed at preferential federal rates, currently 0%, 15%, or 20% depending on taxable income, plus the 3.8% net investment income tax for higher earners. State treatment varies. For an investor sitting on a meaningful gain in private shares, crossing the one-year line can change the federal rate on that gain by more than half.

Short-term capital gains treatment

Short-term gains are taxed as ordinary income, at rates up to 37% federally. Private shares are rarely sold within a year of purchase, given transfer restrictions and the general illiquidity of the asset, but it happens, and when it does the tax difference is real. Holding period is one of several factors in timing a sale of startup equity, and rarely the deciding one.

Secondary purchases and basis

Buying existing shares from another holder resets basis and holding period for you. The seller's original basis and holding period don't transfer; your clock starts on your acquisition date, at your price. This matters most for QSBS, discussed below, but it also means a secondary buyer who purchases at a discount to the last round has a lower basis, and a larger potential gain, than a primary investor at the same round.

SPV and fund investments

At the vehicle level, the SPV has its own basis and holding period in the shares. At your level, you have basis and holding period in your interest. Usually those run in parallel, but not always: if you buy into an existing SPV from a departing member, your holding period in the interest starts on your purchase date even though the vehicle has held the shares for years. When the vehicle sells, the character of the gain (long- or short-term) is generally determined at the vehicle level and passed through, which is one of the reasons SPV tax treatment deserves professional review before you invest.

Why QSBS generally does not apply to secondary purchases

Qualified small business stock under Section 1202 can exclude a large portion of gain from federal tax, which makes it one of the most significant tax attributes in venture investing. It is also one that secondary buyers almost never get. The statute requires that the stock be acquired at original issuance, directly from the company, in exchange for money, property, or services. Shares bought from an existing shareholder fail that test, regardless of whether they qualified as QSBS in the seller's hands. The QSBS guide covers the full requirements.

Two related points. The 2025 tax legislation expanded QSBS (IRC § 1202, as amended) for stock issued after July 4, 2025, adding partial exclusions at three- and four-year holding periods and raising the per-issuer cap to $15 million. Those changes don't alter the original-issuance requirement; a secondary buyer is still outside it. And there are narrow exceptions, such as certain transfers by gift or at death, that can preserve QSBS status in a new holder's hands. Whether any of them apply is a question for a tax professional, not something to assume.

Documents to keep

For a direct purchase: the executed share purchase agreement, the settlement or transfer confirmation showing the date the transfer was recorded, wire confirmations, and invoices for any fee you're adding to basis. For an SPV: the subscription agreement, capital call notices, every annual K-1, and any distribution statements. For either: the 409A valuation or other fair market value evidence at the time of purchase can be useful if the transaction involved anything other than a clean cash purchase at arm's length.

Why records matter at sale

A private share sale gets reported on Form 8949 and Schedule D, where you state proceeds, basis, acquisition date, and sale date. There is no third party filling those fields in for you. If the IRS questions the return, the burden of proving basis is on the taxpayer, and the default for unproven basis is zero, meaning the entire proceeds are taxed as gain. The records aren't bureaucratic caution. They are the basis.

Investors who received their shares through employment rather than purchase face additional layers, including 83(b) elections and the ISO vs. NSO distinction, which affect basis in ways a secondary purchase doesn't. Those are covered elsewhere in the Manual; the guide to selling startup equity is the place to start.

Every transaction on Augment's private marketplace produces a documented record: the executed purchase agreement, the price and share count, the fees charged, and confirmation of when the transfer settled. Those are the inputs to cost basis and holding period, kept in one place rather than scattered across email. For investments through the pre-IPO investment platform, the vehicle's subscription documents and periodic reporting serve the same purpose at the SPV level. Augment doesn't prepare tax returns or provide tax advice, and it doesn't calculate your basis for you. What it does is make sure that when you or your accountant sit down to do it, the documents for your positions in pre-IPO companies are there.

Basis and holding period are fixed when you buy and matter when you sell, which can be years apart. Basis is price plus acquisition costs, tracked at the vehicle level if you invested through one. The holding period starts the day after acquisition and turns long-term after one full year. Secondary purchases reset both and generally fall outside QSBS. The documents from the purchase are what make all of this reportable, and the sale years later is when they get used. Tax treatment depends on jurisdiction and individual circumstances, and the rules summarized here have exceptions this guide doesn't cover. Get a tax professional's read on your specific situation before you sell, and ideally before you buy.