QSBS: Qualified Small-Business Stock Explained

Key points

  • 0% capital gains tax
  • Hold stock for 5 years (if you sell before 5 years, can use the proceeds to buy another QSBS stock within 60 days)
  • Cannot buy stock from another person, must get newly-issued shares
  • Company’s assets must be less than $50 million, both before and after issuing the shares

What is QSBS?

QSBS (aka Section 1202 stock) reduces capital gains tax to 0% as a US-only tax reduction strategy for holding shares 5+ years that qualify for QSBS treatment.

How to qualify for QSBS treatment

  1. Original issuance rule: You cannot acquire stock from another person or through secondary market. The stock must be newly issued shares in a company with less than $50 million valuation post-investment.
  2. Hold stock for 5 years: You must hold the stock for 5 years to qualify for 0% capital gains tax under QSBS
  3. C-Corp: The company must be a C-corp, not an S-corp or an LLC.
  4. No personal services: The company’s business activities typically need to be technology, manufacturing, wholesale or retail. Personal services are prohibited, such as: banking, financing, insurance, investing, leasing, farming, mining, hotels and restaurants.

QSBS benefits

0% capital gains tax!

If you sell your QSBS shares before 5 years, you can use the proceeds to buy another QSBS stock wiithin 60 days to continue the 5 years with no tax hit.

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