West Virginia follows the Section 1202 100% tax exclusion on capital gains from the sale of QSBS. Therefore, capital gains on the sale of QSBS will not only be excluded from federal income taxes, but also state income taxes if all of the guidelines are followed.
Federal QSBS Exclusions and State Tax Implications
Allowing capital gains tax exclusions for Qualified Small Business Stocks (QSBS) encourages investment in US small business. QSBS laws help provide capital for these businesses while offering a savvy tax strategy for investors who want to minimize capital gains taxes.
Investors who hold qualified small business stock for at least 5 years can exclude up to $10,000,000 or more of their recognized capital gains from their taxable income if certain criteria are met.
Learn more about the criteria for Qualified Small Business Stock.
Each state has its own treatment of QSBS gains at the state income tax level. There are three ways in which states typically address the exclusion.
- Some states fully conform to the Federal QSBS guidelines, and therefore allow a full exemption if the stock meets the Section 1202 QSBS criteria. States conform to the federal tax code on either a static or rolling basis. “Static” conformity means the state starts conforming to the Internal Revenue Code as of a specific date. “Rolling” conformity means that the state adopts IRC changes as they occur. Alternatively, certain states do not have state income taxes and therefore there is no QSBS implication at the state level.
- Some states partially conform to the Federal QSBS guidelines, whereby the capital gains from QSBS are exempt if additional criteria beyond the Federal guidelines are met, such as only allowing exemptions if the QSBS gains were from a company doing business in that state.
- Lastly, certain states do not allow any capital gains exclusions for QSBS.
Find out how QSBS is recognized by each state here.
West Virginia QSBS Exemptions
West Virginia follows the Section 1202 100% tax exclusion on capital gains from the sale of QSBS. Therefore, capital gains on the sale of QSBS will not only be excluded from federal income taxes, but also state income taxes if all of the guidelines are followed.
West Virginia follows the “Static” conformity–as stated in the previous paragraphs. West Virginia does, at the Corporate level, conform to the federal treatment of capital gains and losses. See W. Va. Code § 11-24-3(a), as amended by 2021 W. Va. H.B. 2359 (effective Feb. 18, 2021). West Virginia does, at the Individual level, conform to the federal partial exclusion for gain from certain small business stock. See W. Va. Code § 11-21-9(a), as amended by 2021 W. Va. S.B. 693 (effective April 2, 2021).
West Virginia Capital Gains Tax Rates
West Virginia taxes capital gains at the same rates as regular income with 5 tax brackets that range from 3% for income up to $9,999 to 6.5% for income over $60,000 for single taxpayers.
In comparison, federal capital gains tax rates are lower than regular income tax rates and have 3 brackets for single taxpayers which are:
- 0% for $0 to $39,375
- 15% for $39,376 to $434,550
- 20% for $434,551 or more
Entrepreneurship in West Virginia
The West Virginia Small Business Development Center offers,
“confidential, no-cost technical assistance to help start and grow your business in West Virginia. We help you identify your goals, develop valuable skills and acquire the necessary resources to make your business a success.”
Their services include coaching in the following areas: marketing, funding, business management, business planning, human resources, succession planning, cyber security, financial analysis, international trade, government contracting, disaster recovery, and technology commercialization.
Among other industries, the following industries in particular thrive in the state:
- Mining
- Manufacturing
- Agriculture
- Service Industry
Other Programs Offered Besides QSBS that Support Entrepreneurship
The state of West Virginia offers tax credits to small and growing businesses for the creation of jobs as well as for investing in manufacturing property. See the full list of business incentives here.
West Virginia Opportunity Zones
West Virginia is home to approximately 55 Opportunity Zones.
Opportunity Zones (OZ) were created to help economically distressed areas by giving investors preferential tax treatment with new investments in these “specified” areas. Similar to QSBS, if the investment meets eligibility criteria and is held for at least 5 years, the investor can defer or be exempted from capital gains taxes (i.e. if held for at least 5 years, the taxpayer can exclude 10% of the gain and the percentage increases (or “steps up”) to 15% after 7 years).
Opportunity Zone investments can be in the stock of an OZ Qualified Business, an OZ partnership interest or an OZ business property.
To be a Qualified Opportunity Zone Business, the business must meet requirements such as at least 50% of the business’s total gross income being derived from within the Opportunity Zone. To learn more about Opportunity Zone qualifications, please refer to the Opportunity Zones and QSBS article.
Under the Tax Cuts and Jobs Act of 2017, 26 USC 1400Z-2, West Virginia made Opportunity Zones, is also home to the associated tax relief incentives that accompany these zones which are effective for tax years beginning on or after December 31, 2017. Refer to this mapfor the Opportunity Zones in the state and here for all Opportunity Zones in the United States.
Some Examples of Opportunity Zone Funds in West Virginia include:
- Accredited Capital (Multi-Family Housing, Residential, Single-Family Housing)
- Woodforest CEI-Boulos Opportunity Fund (Affordable Housing, Commercial, Grocery, Healthcare, Industrial, Mixed-Use, Multi-Family Housing, Office, Senior Housing, Student Housing, Workforce Housing)
See more at Opportunity Zone Database.
This article does not constitute legal or tax advice. Please consult with your legal or tax advisor with respect to your particular circumstance.
