Secondary Market (Private Shares)

What it means

The secondary market is where shares of a private company change hands between investors, employees and funds, through platforms like Forge or EquityZen or a company-run tender offer. You buy from another shareholder, not from the company.

A simple example

Alex buys 2,000 shares at $25 on a secondary platform, so her cost basis is $50,000. The company goes public at $40. She owes nothing at the IPO. After the lockup she sells at $45 for $90,000. Her $40,000 gain is a capital gain: long-term rates if she held more than a year from her purchase date, salary rates if not.

Why it matters to you

• The IPO itself is not a tax event. You owe tax only when you sell.
• Your cost basis is what you paid, including fees.
• Your holding period starts on your purchase date.
• Shares bought on the secondary market generally don't qualify for QSBS.
• A lockup may still stop you from selling for months after the IPO.

Common mistakes to avoid

• Assuming the QSBS tax break carries over from the seller.
• Selling just before the one-year mark and paying salary rates on the gain.
• Forgetting no tax is withheld on the sale, so you may need an estimated payment.

Words used on this page

• Cost basis: what you paid for the shares.
• Holding period: how long you've owned them.
• Lockup: a period after the IPO when certain holders can't sell.