The Most Overlooked Tax Break for Long-Term Investors: Qualified Small Business Stock Gain Exclusion

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The section 1202 qualified small business stock (QSBS) gain exclusion is one of the most overlooked tax breaks for long-term investors. The QSBS gain exclusion allows noncorporate taxpayers to exclude up to 100% of capital gains earned when they sell QSBS that they held for more than five years.

Staff Accountant Heena Patel explains the basics of the QSBS gain exclusion during this video overview.

What QSBS Gain Amount Can Be Excluded?

The QSBS gain that can be excluded should be the greater of $10 million per corporation or 10 times the taxpayer’s cost basis in the stock, which is an annual limit.

Up to 50%, 75%, or 100% of capital gains can be excluded based on the acquisition date of qualified small business stock.

Eligibility

There are certain conditions that must be met to claim this exclusion:

  • The stock must be issued by a domestic C corporation after August 10, 1993.
  • The aggregate assets of the corporation cannot exceed $50 million before or immediately after the stock was issued.
  • 80% of the assets of such a corporation are used in active conduct of a qualified trade or business.
  • The stock must be held by a noncorporate taxpayer, such as individuals, partnerships, trusts, estates, or S corporations.
  • The stock must be held for at least five years, and the stock must be of original issuance acquired in exchange for money or properties other than stock.
  • The corporation must be an eligible corporation when the stock is issued, and for a substantial portion of the taxpayer’s holding period.
  • Stock issued within one year after significant stock is redeemed may be disqualified.

Qualifications can vary based on individual circumstances.

Conclusion

For help claiming the QSBS gain exclusion, or understanding whether you qualify, please contact your Chugh CPAs, LLP tax professional.