QSBS – A Little Known Tax Break With Major

April 3, 2016

Robert Katz, CFP®


What is QSBS?

Qualified Small Business Stock is one of the best, little known tax breaks available to those investing in small companies – the gain on such stock may be eligible for partial/complete exclusion OR rollover to another QSBS.

Section 1202 – Exclusion of Capital Gain

IRS Sec. 1202 allows taxpayers to exclude a portion – or all – of capital gains on sales of QSBS depending on when the stock was acquired, giving consideration to the following:

  • Must have held QSBS > 5 years
  • Maximum exclusion is greater of ten times basis or $10M, per issuing corp.
  • All non-excluded gains are taxed at 28%, not 20%, even though the stock was held for more than one year (does not include potential 3.8% on NII).

Federal Exclusion of Gain

Section 1045 – Rollover Option

IRS Sec. 1045 allows taxpayers to defer capital gains on sales of QSBS by using sale proceeds to purchase replacement QSBS, under the following guidelines:

  • Must have held QSBS > 6-months
  • Replacement QSBS must be purchased within 60 days of disposition
  • Replacement QSBS must be an active business for at least 6-months following purchase
  • Holding period and cost basis carry over to new QSBS from QSBS that was sold

Who Stands to Benefit?

  • Founders and entrepreneurs
  • Venture capitalists
  • Angel investors
  • Those individuals investing in venture capital funds, private equity funds, or other pass-through entities investing in qualified small businesses
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