Qualified Small Business Stock (IRC §1202)
Exploring the significant capital gains tax exclusion benefits for investors in certain small businesses.
What is QSBS?
Section 1202 of the Internal Revenue Code provides a powerful tax incentive for investors in Qualified Small Businesses. If certain conditions are met, investors can exclude some or all of their capital gains from federal income tax when they sell their stock.
To qualify, the stock must be acquired at its original issuance from a domestic C-corporation with gross assets not exceeding $50 million, among other requirements.
The Exclusion Benefit
Capital Gains Exclusion
For qualifying stock held for more than five years, investors can exclude up to 100% of the gain, limited to the greater of $10 million or 10 times the adjusted basis of the stock.
Strict Requirements & Risks
The rules for QSBS are highly complex and strict. Not all small business stock qualifies. These are venture-capital-style investments that carry a high degree of risk, including the potential for total loss. State tax treatment may vary.