.svg)
Qualified Small Business Stock can exclude millions of dollars of gain from federal tax when you sell. You do not claim it at exit. You qualify for it at issuance, or you do not qualify at all.
Section 1202 of the tax code lets founders and early shareholders exclude gain on the sale of qualified small business stock from federal income tax. For a founder whose company exits well, this is frequently the single largest number in their financial life. It is also the one most often lost by accident.
The clock and the qualification are set when the shares are issued to you. Nothing you do at exit can retroactively make non qualifying stock qualify.
The exclusion cap applies to each holder, not to the company. Founders, early employees and angels can each have their own.
Converting from an LLC too late, crossing the gross assets threshold, or a redemption at the wrong time can each break it, usually without anyone noticing at the time.
All of these have to be true. Missing one is enough to lose the benefit entirely.
LLCs and S-corps do not issue QSBS. If you started as an LLC, the conversion date matters, because your holding period generally starts then and not when you founded the business.
The company's gross assets must sit below the statutory ceiling both before and immediately after your shares are issued. This is why a large round can close the door for everyone issued after it.
You have to receive the shares from the company. Stock bought from another shareholder on a secondary market is not QSBS in your hands.
Most of the company's assets have to be used in an active trade or business. Holding a large cash pile from a raise for a long time can put this at risk.
Professional services, health, law, financial services, hospitality, farming and mining are excluded. Software and most technology businesses are not, but the line is worth checking early if your model touches a listed field.
There is a minimum holding period before any exclusion is available, and the percentage excluded steps up the longer you hold. The exact schedule and caps depend on when your stock was issued, so this is one to confirm against your own issuance date.
Thresholds, caps and holding periods have changed in recent legislation and differ depending on when your shares were issued. Treat the above as the shape of the rules, not as the numbers for your specific stock.
QSBS is not a service you buy on its own. It is a set of decisions made correctly at formation and then documented so the position survives diligence years later.
Entity choice, issuance timing, and founder stock structured so your shares qualify from day one. Included in the formation package.
A gross assets attestation recorded at the time of issuance, so the evidence exists while it is easy to produce.
A check on whether the round will push the company past the threshold, and whether anyone should be issued stock before it closes.
I converted from an LLC. Did I lose QSBS?
+
Not necessarily, but your holding period generally starts at conversion, and the gain that accrued while you were an LLC is usually outside the exclusion. Worth modelling before you assume either answer.
Do my employees get QSBS too?
+
Shares issued directly by the company can qualify in the holder's hands, which includes early employees who exercise options. Each holder has their own cap. This is a real and underused part of an option plan's value.
Does my state honour it?
+
Some do not. California, notably, does not follow the federal exclusion. Your federal position and your state position can differ, so plan for both.
Is it too late for me?
+
Sometimes yes, and we will tell you plainly. But there are also situations where future issuances still qualify even though earlier ones do not, which is worth knowing before your next round.
Do I need this reviewed by a tax adviser as well?
For anything with real money attached, yes. We structure and document the position and work alongside your accountant rather than instead of them.
Tell us when your company was formed, when your shares were issued, and what you have raised. We will tell you where you stand before you spend anything.
Book an intro call