There are five circumstances in which a distribution of property other than cash to an LLC member can trigger gain recognition for the LLC or an LLC member. A distribution of ‘marketable securities’ to an LLC member can trigger one of the five circumstances where a member or LLC must recognize gain on a distribution of assets to a member.
In general, distributions of property other than cash from an LLC taxed as a partnership are tax-free to the members. This feature of an LLC is one reason why a business operating as an LLC may choose to be taxed as a partnership rather than a corporation.
‘Marketable securities’ are financial instruments and foreign currencies that are actively traded on a public securities market. IRC Section 731(c) treats the distribution of marketable securities to an LLC member as a distribution of cash to the member in an amount equal to the fair market value of the securities.
Upon a distribution of marketable securities to an LLC member, the member will recognize gain equal to the amount the deemed cash received exceeds the member’s tax basis in their LLC membership interest.