The Dime💰 - QSBS and A Note From CJB

The right tax strategy can make a massive difference when you're building a company or backing one, and QSBS is one of the biggest tax advantages out there. If you play your cards right, you could exclude up to $10 million (or 10 times your investment) from federal capital gains taxes under 26 U.S. Code § 1202. Let’s break it down.

What is QSBS?

QSBS stands for Qualified Small Business Stock, and it’s a special tax incentive under 26 U.S. Code § 1202. The idea is to reward people for investing in small businesses. If you hold QSBS for at least five years, you might be able to exclude 100% of your capital gains from federal taxes. That means more money in your pocket and a major reason why investors love early-stage startups.

Who Qualifies for QSBS?

Not every company or investor qualifies for QSBS. The company must be a C-Corporation—LLCs and S-Corps don’t qualify (26 U.S. Code § 1202(c)(1)). If you’re an LLC, you’d have to convert to a C-Corp, and the five-year clock starts the day you convert, not the day you first issued shares. The company must be engaged in an active trade or business, meaning certain industries, like finance, law, and healthcare, are not eligible (26 U.S. Code § 1202(e)(3)). The company’s gross assets must be under $50 million at the time of stock issuance (26 U.S. Code § 1202(d)(1)). The stock must be acquired directly from the company, meaning you can’t buy it secondhand from another investor (26 U.S. Code § 1202(c)(1)).