Strategy 05
Qualified Small Business Stock, Section 1202
Qualified small business stock gain exclusion under Internal Revenue Code §1202.
Discuss this strategyWhat it is
Internal Revenue Code §1202 allows a non-corporate shareholder to exclude from federal income tax some or all of the gain on the sale of Qualified Small Business Stock (QSBS) held for more than five years. To qualify, the issuing corporation must be a domestic C-corporation with gross assets at or below the §1202 threshold at the time of issuance, the stock must be acquired at original issuance, and the corporation must conduct a qualified active trade or business during substantially all of the holding period. The maximum excludable gain per issuer is the greater of $10 million or ten times the taxpayer's adjusted basis. For stock acquired after July 4, 2025, the cap is the greater of $15 million or 10x basis, with partial exclusions at 3 and 4 years. Earlier stock keeps the $10 million / five-year rules.
Who it is for
Founders, early employees with founders-equivalent stock, and angel or seed investors in C-corporations that meet the QSBS gross-asset and active-business tests, with a realistic multi-year hold horizon (three years for a partial exclusion on stock acquired after July 4, 2025, five years for the full exclusion).
Related strategies
Three strategies that travel with this one.
Strategy
Entity Optimization
Structuring business entities (S-corp, C-corp, LLC, partnership) for optimal tax treatment.
Strategy
Equity Tax Timing, Section 83(b) Election
Timing-of-taxation election on restricted property and equity compensation under IRC §83(b).
Strategy
Ordinary Loss Treatment, Section 1244
Ordinary loss treatment for losses on qualifying small business stock.
Next step
See whether this strategy fits your facts and circumstances.
The first call is fact finding only. We tell you whether this strategy belongs in your plan, and what would have to be true for it to apply.
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