Good News on Taxes Came Too Late for Many SPACs

Last week, the Treasury Department and Internal Revenue Service surprised the market when they said that SPAC liquidations wouldn’t be taxed under a new federal buyback levy. Blank-check companies that tried to beat the tax ended up locking in their losses. SPACs that didn’t liquidate have more time to try to find a deal and potentially squeeze out a profit if market conditions shift. 

“The timing could not have been worse” for the SPAC liquidators, said

Julian Klymochko,

who manages a SPAC-focused fund at Accelerate Financial Technologies. 

The possibility that SPACs would face a 1% buyback tax for the cash they returned to investors led more SPACs to shut down in December than in the market’s history. Creators have lost about $1.25 billion from winding down SPACs in the past year, figures from data provider SPAC Research show. 

The clarification from the federal government still isn’t likely to shift sentiment in the once-booming market, analysts say. Roughly 300 SPACs holding more than $70 billion face deadlines by midyear to reach deals, including some that have already announced mergers but haven’t closed them, according to Dealogic. Many SPACS will likely shut, analysts said. 

“It just provides a bit of relief for a really challenged asset class,” Mr. Klymochko said.

A SPAC is a shell firm that raises money from investors and lists publicly with the sole intent of combining with a private company to take it public. After regulators approve the merger, the company going public replaces the SPAC in the stock market. Such deals became popular alternatives to traditional initial public offerings in 2020 and 2021, fueling a bubble as creators minted tens of millions of dollars on average by taking hot startups public.

As rising interest rates and high inflation roiled markets last year, SPACs tanked. Shares of companies to go public through SPACs, such as electric-vehicle startup

Arrival SA

and real-estate technology platform

Opendoor Technologies Inc.,

tumbled. 

Now it is difficult for creators such as venture capitalist

Chamath Palihapitiya

and banking veteran

Betsy Cohen

to convince companies to merge with SPACs. That sparked a string of liquidations before worries about the possible tax accelerated the trend last month.

The recent IRS guidance gives companies information as they begin complying with the law. The agency still plans to write formal regulations. 

The guidance also clarified that investor withdrawals before SPAC deals are completed might avoid the buyback tax depending on the timing of the merger and other conditions. That could make it easier for some mergers to get done this year.

Write to Amrith Ramkumar at amrith.ramkumar@wsj.com

Last week, the Treasury Department and Internal Revenue Service surprised the market when they said that SPAC liquidations wouldn’t be taxed under a new federal buyback levy. Blank-check companies that tried to beat the tax ended up locking in their losses. SPACs that didn’t liquidate have more time to try to find a deal and potentially squeeze out a profit if market conditions shift. 

“The timing could not have been worse” for the SPAC liquidators, said

Julian Klymochko,

who manages a SPAC-focused fund at Accelerate Financial Technologies. 

The possibility that SPACs would face a 1% buyback tax for the cash they returned to investors led more SPACs to shut down in December than in the market’s history. Creators have lost about $1.25 billion from winding down SPACs in the past year, figures from data provider SPAC Research show. 

The clarification from the federal government still isn’t likely to shift sentiment in the once-booming market, analysts say. Roughly 300 SPACs holding more than $70 billion face deadlines by midyear to reach deals, including some that have already announced mergers but haven’t closed them, according to Dealogic. Many SPACS will likely shut, analysts said. 

“It just provides a bit of relief for a really challenged asset class,” Mr. Klymochko said.

A SPAC is a shell firm that raises money from investors and lists publicly with the sole intent of combining with a private company to take it public. After regulators approve the merger, the company going public replaces the SPAC in the stock market. Such deals became popular alternatives to traditional initial public offerings in 2020 and 2021, fueling a bubble as creators minted tens of millions of dollars on average by taking hot startups public.

As rising interest rates and high inflation roiled markets last year, SPACs tanked. Shares of companies to go public through SPACs, such as electric-vehicle startup

Arrival SA

and real-estate technology platform

Opendoor Technologies Inc.,

tumbled. 

Now it is difficult for creators such as venture capitalist

Chamath Palihapitiya

and banking veteran

Betsy Cohen

to convince companies to merge with SPACs. That sparked a string of liquidations before worries about the possible tax accelerated the trend last month.

The recent IRS guidance gives companies information as they begin complying with the law. The agency still plans to write formal regulations. 

The guidance also clarified that investor withdrawals before SPAC deals are completed might avoid the buyback tax depending on the timing of the merger and other conditions. That could make it easier for some mergers to get done this year.

Write to Amrith Ramkumar at amrith.ramkumar@wsj.com