How to account for selling shares in private company with 'earn-out' payments?

I am a shareholder for a company going through an acquisition and am unsure how the sale of my shares should be accounted for to the IRS and my personal tax consequences. I originally bought the shares for $1 five years ago. I am selling the shares and will be paid cash amounting to $2/share upon purchase. However, as part of the purchase agreement for the next two years I will be given a $1/share at the end of each successive calendar year - for a total of $4/share. My understanding is I would have a capital gains of $1/share ($2 minus $1) this year. Each of the following years I would have a capital gain of $1/share ($1 minus $0). Is my logic correct here? Can you have a basis of $0 or is that going to start setting off (audit) flags. I would sincerely hope to not have to show a capital gain for the full amount as I perceive a non-trivial amount of risk to the future payments as it is predicated on company's positive cash flow. Any help would be appreciated.

1 year ago - 1 answers