Suppose ABC Corp hired a CFO and granted them 5% of the employee stock option pool that vests over 2 years. At the time of the granting and vesting the company qualified as a Qualified Small Business and therefore the stock and stock options qualified as QSBS.
At the end of the two year vesting period, the CFO exercised all of their QSBS stock options for $100,000. Then, after holding the QSBS stock options for 5 years after exercising them, the CFO sold their QSBS stock options to a private equity firm for $1,000,000, resulting in a $900,000 gain.
Due to the QSBS qualifications and 100% QSBS exemption, the CFO saved $214,200 million in federal capital gains taxes ((1,000,000 – 100,000) x 23.8%).
Depending on how the CFOs state treats QSBS, there may be additional tax savings.
Explore 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.