The Qualified Small Business Stock (QSBS)

tax exemption may allow you to avoid 100% of the capital gains taxes incurred when you sell a stake in a startup or small business. Here we discuss how you can apply this exemption and what you need to do to qualify.

If you own a stake (or plan to invest) in a startup or small business, you need to know about an important tax planning tool available to you. If you qualify, you may be able to avoid federal taxes on any and all capital gains you realize when you exit.

The tax benefit we are discussing is called the “QSBS exclusion,” which is shorthand for a provision in Section 1202 of the Internal Revenue Code (IRC). This section of the IRC outlines rules that potentially let you exclude from federal taxation the entire gain on the sale of Qualified Small Business Stock (QSBS). This exclusion was enacted in 1993 with a 50% limit, but recent updates to the Code have expanded it to a 100% gain exclusion.

Note that the exclusion is limited to gains of $10 million, or 10 times the basis of your initial investment, whichever is greater. If your gains exceed those limits, you will not be able to exclude all of your gains from federal taxation; however, the allowable exclusion is still likely to be quite meaningful in nearly all cases.

So what boxes do you need to check to use the QSBS exclusion? Generally, you can use the exclusion if:

you have held the stock for at least five years,

the stock was issued after August 10, 1993,

the stock was issued by a domestic C corporation, with a max of $50 million of gross assets when the stock was issued,

company uses at least 80% of its assets in an active trade or business, and

you are a non-corporate taxpayer.

This is article is for informational purposes only and does not constitute legal or tax advice !