Since the characteristics of a „SAFE“ differ from those of the more traditional debt and participation shares, the tax treatment of a SAFE may not be clear. There are a few details that every SAFE owner should know: the IRS has decided that a CFVP is respected as a CFVP and is not treated as a sale of the underlying stock as long as the taxpayer (1) has received a fixed amount of money, (2) has entered into an agreement at the same time to deliver at a future date a number of shares that have changed significantly on the basis of the value of the shares on the stock exchange on the day. ( 3) the maximum number of shares delivered under the agreement, (4) an unlimited legal right to replace cash or other shares with underpaid shares and (5) was not economically required to deliver the shares in the form of pledges on the expiry date of the contract.15 The IRS` conclusion that the taxpayer had not sold the shares at the time of the contract and that the term contract was instead owed be considered a CFVP. , was based primarily on a small number of factual findings, including the finding that the seller retained all participation rights and that the taxpayer was not required to deliver the shares under the record to the counterparty. In the typical SAFE agreement, the entity receives a fixed amount of money and at the same time enters into an agreement for the delivery of a number of shares or a cash amount that varies considerably depending on the value of the shares at the settlement date. In addition, until the shares are delivered, the investor does not have dividends or voting rights on those shares. As a result, the benefits and expenses of ownership of these shares were probably not transferred to the investor. When safe is received at the purchase price and is treated as a capital grant, the investor`s holding period in the stock that underlies safe begins on the day the investor acquired safe. This is an advantage of pre-treatment of capital, which may become particularly relevant depending on the time, when an investor wishes to qualify the stock as a „Qualified Small Business Stock“ to obtain a tax exemption on profits when those shares are sold in accordance with Section 1202, or even to long-term capital gains.16 However, it is not clear what the consequences of a SAFE investment are on the valuation of the company. The IRS does not have guidelines on whether the issuance of a SAFE would assess 409A or what impact the instrument would have on such an assessment. SAFE designer Carolynn Levy argued that a SAFE is simply a convertible security with a creative acronym, as an option.
It also admitted that, in accounting terms, an unsecured convert voucher with an automatic conversion function „would not fit into the IRS debt definition“ but „would not fit into the IRS definition of capital.“ The more likely or secure it is (based on the circumstances surrounding the issuance of SAFE) that SAFE is converted into shares, the more support for the safe processing is a capital grant. For example, if SAFE is issued at a time when equity financing (and therefore conversion) is essentially secure very quickly after its issuance, the issuance of SAFE is more like obtaining equity than derivative.