To pin down if your stock options qualify for QSBS, whether exercised or not, you should first run through the QSBS criteria to ensure that the underlying stock is QSBS qualified.
Explore the basics of QSBS here.
If your company recently had a round of financing, the Stock Purchase Agreement may contain QSBS representations and covenants, which would indicate that your company recently evaluated if they qualify as a QSB. Speak with your company, accountant, or attorney to gather the right information.
If the company qualifies as an eligible QSBS corporation than it is up to you to stay compliant with the section 1202 QSBS requirements as QSBS requires not just that the company / stock qualifies, but also has certain requirements for the holder of the stock.
One of the requirements for the QSBS acquirer is that they have to hold the stock for five years before selling. The five year holding period does not start for stock options until the day they have been exercised and the stock is issued; therefore, you will want to exercise your options as soon as possible for QSBS purposes.
Once exercised, if your otherwise QSBS qualifying shares are sold before the 5-year time horizon, you can extend your holding period through a section 1045 rollover.
If your stock options do qualify you will save up to 23.8% on capital gains taxes when the stock is sold.
Even though the tax savings are attractive it could come with a few trade-offs if the stock is exercised early, depending on if your shares are qualified or non-qualified.
Let’s explore a real-world example of exercising your QSBS stock options or click here for more on whether stock options qualify 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.