Tax exemption under IRC Section 1202 for qualified small business stock gains Up to 100% exclusion on gains — the greater of $10M or 10x your cost basis Benefits startup founders, early employees, and investors with eligible stock Applies to federal taxes; state treatment varies (some states do not conform)

Company Qualification Criteria

Company must be a domestic C-corporation at the time shares are issued Aggregate gross assets cannot exceed $50 million at time of stock issuance At least 80% of company assets must be used in active business operations Certain industries are excluded: finance, hospitality, farming, mining, professional services

Share Acquisition Requirements

Must acquire original-issue shares directly from the company (not secondary market) Stock options qualify once exercised into actual shares from the company SAFE agreements and convertible notes have uncertain QSBS eligibility — consult a tax advisor Shares received through compensation, contribution of property, or cash purchase can qualify

Holding Period Requirements

Must hold qualifying shares for at least five years for full 100% exclusion The exclusion percentage (50%, 75%, or 100%) depends on when shares were acquired Stock acquired after September 27, 2010 qualifies for the 100% exclusion If sold before 5 years, can defer gain by rolling into new QSBS within 60 days

Advanced QSBS Strategies

Gift shares to family members — each recipient gets their own $10M exclusion Trust stacking: transfer shares to multiple trusts to multiply the exclusion cap Exercise options early to start the five-year holding clock sooner Consider Section 1045 rollover to defer gains into replacement QSBS

Tax Reporting and Documentation

Report QSBS sales on Schedule D and Form 8949 with your tax return Maintain records of stock purchase agreements, company financials, and asset tests IRS may challenge QSBS claims — thorough documentation is essential Statute of limitations is generally 3 years but can extend to 6 for substantial omissions

QSBS can exclude up to $10M (or 10x basis) in federal capital gains tax Exercise options early and hold at least five years to maximize the benefit Maintain detailed records of company size, active business use, and share issuance Consult a tax advisor for complex situations involving SAFEs, gifting, or trusts

Qualified Small Business Stock (QSBS)

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What is QSBS?

Tax exemption under IRC Section 1202 for qualified small business stock gains
Up to 100% exclusion on gains — the greater of $10M or 10x your cost basis
Benefits startup founders, early employees, and investors with eligible stock
Applies to federal taxes; state treatment varies (some states do not conform)

Options Overlay Direct Indexing

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What is QSBS?

Company Qualification Criteria

Share Acquisition Requirements

Holding Period Requirements

Advanced QSBS Strategies

Tax Reporting and Documentation

Key Takeaways

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What is QSBS?

Company Qualification Criteria

Share Acquisition Requirements

Holding Period Requirements

Advanced QSBS Strategies

Tax Reporting and Documentation

Key Takeaways

Related Topics

QSBS Stacking Strategies

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