Say goodbye to capital gains with QSBS!

Qualified Small Business Stock (QSBS) may allow you to exclude gains on all or a large portion of your Federal capital gain tax when you sell your stock.

Sean O’Keefe
Sean O’Keefe

Jul 1, 2022

2 min read
Say goodbye to capital gains with QSBS!

What is Qualified Small Business Stock (QSBS)?

QSBS is a tax rule that was created to encourage founders, startup employees, and VCs to purchase stock in startups (and other small businesses) by allowing the opportunity to avoid tax on some or all of their gain from the sale of stock that qualifies for QSBS.

What is the tax benefit of QSBS?

You may be eligible to eliminate tax on all or a large portion of your Federal capital gain when you sell - zero Federal tax. Many taxpayers are unaware of the benefits of QSBS and may be missing out on potential savings.

I heard the tax exclusion is limited to 10x your tax basis or $10m?

Gains from selling Qualified Small Business Stock (QSBS) may be eligible for up to 100% exclusion from federal income tax – which means, when you sell your qualifying stocks, you could avoid paying federal tax on gains of up to $10 million or 10x your tax basis (basis for this purpose is equal to the amount of cash plus the fair market value of any property contributed to the corporation in exchange for the stock). For example, if you invested $3 million in a QSBS in 2019, you could sell that stock five or more years later for up to $33 million and pay zero federal income tax on that gain. Companies and individuals must follow certain requirements in order to qualify.

Checklist to determine if you meet basic requirements for QSBS

The specific requirements to determine whether or not a stock is QSBS are explained in detail below.

If you answer "NO" to any of these questions you do not qualify.

  1. Is the stock issued by a domestic C corporation? If, yes - keep going
  2. When you acquired the stock was it originally issued to you (e.g. not from a secondary market) in exchange for money, other property (not including stock), or as compensation for services provided to the corporation? If, yes - keep going
  3. Was the value of the corporation's gross assets under $50 million up until the date of stock issue and immediately after? The assets should be valued at original cost, not fair market value (with the exception of contributed property). Funds raised to date is a good indicator of gross assets. crunchbase.com is a great place to check your company's fund raising history. If, yes - keep going
  4. Was the stock issued after August 10, 1993? If, yes - keep going
  5. Does the corporation conduct an "active trade or business" during substantially the entire holding period of your stock? To qualify, at least 80% of the corporation's assets must be used in the "active trade or business" during your entire holding period. If, yes - keep going
  6. Have you owned the stock for more than five years? If, yes, you're all set! Consider talking to one of our tax professions for help filing your tax return and claiming QSBS.

YearEnd tax professionals focus on the unique circumstances of founders, startup employees, VCs and their companies. We are well-versed in the intricacies of QSBS, the associated filings and documentation, and steps that may be needed to meet the requirements. Let us know if we can help.

This article is provided for illustrative purposes only; it does not provide personalized tax, legal, financial, or other professional advice. Your situation may be different; consult a professional for information concerning your individual tax, financial, or legal situation before taking any action.