QSBS stands for “Qualified Small Business Stock” and is regulated by the Internal Revenue Service (IRS) under code Section 1202, offering tax benefits to accredited investors, investment funds, employees, and founders. QSBS is a tax benefit on a federal and in some cases also extends to a state level. The tax benefit excludes 100% of capital gains on the sale of QSBS held for 5 years with tax savings up to the greater of $10 million or 10x the initial investment if the company qualifies as a Section 1202 qualified small business. Below are high-level rules and here is a history of QSBS.
To be eligible for QSBS here are the main requirements on a company and investor level with links to explanations:
- Does the stock I hold qualify as QSBS?
- The QSBS was issued after August 10, 1993.
- The company must be classified as a “eligible” Domestic C Corporation.
- The aggregate gross assets of the company are less than or equal to $50 million.
- The business operates within a qualified industry under section 1202.
- The corporation passes the active trade or business test.
- The corporation has not made certain purchases of its own stock.
- Is my gain excluded from capital gains taxes?
- The QSBS has to be held for five years.
- The stock was acquired for money, property, or services.
- The stock was acquired directly from the company.
- The stock was acquired by an individual or pass-through entity.
- How much of my gain is excluded from capital gains taxes?
- The QSBS capital gain is equal to or less $10 million or 10x the initial investment.
- Can my gain be rolled over if my QSBS is sold early?
- Do I need to apply for QSBS qualification?
- Does my state allow the QSBS tax exclusion?
- Do my stock options qualify for QSBS?
- Do limited partner venture capital investment(s) qualify for section 1202 QSBS?
- How can I find more great QSBS companies to invest in?