Tax considerations for SPAC investors

Most SPACs are not American companies

A large share of SPACs are incorporated in the Cayman Islands, even when the team, the offices and the eventual target are all in the United States. The prospectus states the domicile plainly and it is one of the first things to check, because it drives most of what follows for a U.S. taxable holder.

A non-U.S. corporation holding mostly interest-bearing assets can meet the definition of a passive foreign investment company. That classification carries its own reporting and its own consequences, and it is the single most consequential tax question about the structure for a U.S. individual.

Redemption is generally a disposal

Handing shares back for trust value is generally treated as a sale rather than as a return of capital, with gain or loss measured against your basis. For someone who bought below trust and redeemed at trust, that gap is generally a gain, and its character depends on the holding period.

Units, and the allocation problem

A unit is one purchase of two or three securities. When it separates, basis has to be allocated between the share and the warrant, generally by relative fair value at separation. Brokers do not always do this well, and the allocation affects every subsequent calculation.

Warrants

Warrants are generally capital assets. Selling one is a disposal. Exercising is generally not a taxable event in itself but rolls basis into the shares received. Expiry worthless is generally a capital loss. Each of those has conditions attached that depend on the specific terms.

The merger itself

Whether a combination is tax-free to continuing shareholders depends on how it is structured, and the S-4 contains a section describing the intended treatment along with its caveats. That section is written by lawyers who are careful for a reason, and it is worth reading rather than assuming a rollover.

Questions worth asking an adviser

• Is this vehicle a PFIC for my purposes, and what elections are available to me?
• How has my broker allocated basis between the share and the warrant at separation?
• Will my holding period be long or short at the likely redemption date?
• What treatment does the S-4 describe for continuing shareholders, and what conditions does it attach?