For gains on the sale of stock to qualify for the Section 1202 capital gains tax exclusion, there are two main criteria on a stockholder level, which are (i) how the stock was acquired, (ii) how long the stock has been held, (iii) how the stock was purchased, and (iv) whether the company has made any stock redemptions. The first requirement is targeted towards an individual investor or investment fund because the stock has to be acquired directly from the qualified small business issuing the QSBS. This means that QSBS can not be purchased on a secondary market or from another holder of QSBS.
*There are some instances where the stock can be acquired from another QSBS holder.
The second requirement applies to all stakeholders, whether you are an individual investor, investment fund, or employee you have to hold the stock for at least five years starting on the date of the issuance of the stock to you. If the stock is sold early you either (a) have to forfeit the gain exclusion or (b) you can roll the proceeds from the sale into replacement QSBS issued from another qualifying small business, utilizing Section 1045.
The third guideline outlined in Section 1202 states that QSBS can be acquired in exchange for cash, property (excluding stock), or services (compensation).
The fourth guideline is referring to a company that had a stock redemption. There are two stock redemption events that disqualify QSBS, which are (i) the company acquired stock from the QSBS holder or related party within a four year time period and/or (ii) the company made a stock redemption over a de minimis amount within a two year time period.
Frequently Asked Questions
QSBS Acquisition Criteria
- Can a Partnership Own QSBS?
- QSBS Tax Treatment for General Partners
- Does My Inherited Stock Qualify for QSBS?
- Does Section 1202 QSBS Include Carried Interest?
- If I Buy QSBS Today, Then I Add to My Position Later When It Is Not QSBS, Does That Invalidate My QSBS?
- Do Limited Partner Venture Capital Investment(s) Qualify for Section 1202 QSBS?
- Do My Stock Options Qualify for QSBS?
- Does My Gifted Stock Qualify for QSBS?
- What If I Make a Second QSBS Investment in the Same Company?
- Can QSBS Qualification Be Maintained In the Transfer of a Gift or Through an Estate?
- Can QSBS Be Purchased from a Founder, Investor, or Employee of the Company?
- How is QSBS Valued in Exchange for Property?
- Is There Any Property That Can’t Be Exchanged for QSBS?
- Can Any Service Qualify for QSBS Compensation?
- What if QSBS is Sold, Acquired, or the Company is Merged Before Five Years?
- Is the QSBS Required Holding Period Affected in a Tax-Free Transfer?
- Can QSBS Be Transferred or Sold Without Restarting the Timeline?
- What Happens if I Sell My QSBS in Under Five Years?
- When Does My Timeline Start for QSBS?
This article does not constitute legal or tax advice. Please consult with your legal or tax advisor with respect to your particular circumstance.