What is QSBS?
Most people—even many advisors—are not familiar with the QSBS, the Qualified Small Business Stock exemption. QSBS is designed to encourage investment in small, growing companies by allowing investors to exclude a portion or even all of the capital gains they realize from the sale of certain small business stocks.
This means you could potentially exclude a significant portion (or even all) of the capital gains from federal income tax when you sell the stock. Additionally, the excluded gains are also not subject to the alternative minimum tax (AMT) or the 3.8% net investment income tax (NIIT).
For example, if you invested $100,000 in a qualified tech startup in 2012—and the company grew rapidly, increasing the value of the stock to $1M in 2023, you could sell that stock and exclude the entire $900,000 capital gain from your federal income taxes. So you can see, this exemption could have massive impact on your tax situation.
How much of your investment can be excluded?
The exact amount of the exclusion depends on when the stock was acquired:
- 50% exclusion for stock acquired between 1993 and February 17, 2009.
- 75% exclusion for stock acquired between February 18, 2009, and September 27, 2010.
- 100% exclusion for stock acquired after September 27, 2010.
The tax exemption is not unlimited—QSBS protects up to 10 times your original investment from long-term capital gains taxes—or $10 million—whichever is greater.
What kinds of investments or stocks qualify?
To qualify, the small business stock must meet specific criteria outlined by the IRS—such as:
- Having gross assets of less than $50 million at the time the stock was issued (or options were executed).
- The stock must be issued by a domestic C corporation (not an LLC or S Corp).
- You must acquire the stock at its original issue (not from a secondary market).
- The stock must be held for more than five years.
- The issuing company must use at least 80% of its assets in the active conduct of a qualified trade or business during the holding period.
How can you take advantage of QSBS?
In closing, please note that to take advantage of this, you or your tax professional will need to file Form 8949 when doing your taxes in the year you sell the stock. Further, some states do not conform to federal QSBS rules, so you may need to account for state tax on the gain even if it’s excluded federally. If you have questions about QSBS, or are planning to sell small business stock, please reach out to Range
Related links:
My company gave me stock options. How do they work?
What should I know about Alternative Minimum Tax (AMT)?
Five Reasons You Should Graduate From DIY to a CPA or Tax Professional
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