QSBS + Stock Options = Maximized Returns
If you are an employee or contractor and you have received stock options there are a few questions that are imperative to ask upfront (i) what are the tax effects, (ii) when should I exercise my stock options, (iii) do my stock options qualify for QSBS, and (iv) where can I sell my stock options (e.g. EquityBee or ESO Fund).
So what is this QSBS? QSBS stands for qualified small business stock under Section 1202 of the tax code. If all the guidelines are met for QSBS the taxpayer could be eligible for a 100% capital gains tax exclusion, which could turn out to be millions in tax savings. Depending on your situation, you should consult with your company and accountant to document the QSBS qualifications upfront. Below are the guidelines to follow or to be aware of:
- Qualified entity structure
- Qualified industry
- Qualified size
- Active trade or business
- QSBS acquisition criteria
- QSBS timeline
- QSBS gain exclusion cap
- Percent of gain excludable
* A bonus question to think about is what if your company is sold along with your stock before the QSBS 5-year holding period is met? We have an article series of this very issue. There is a second section of the tax code, Section 1045, that allows taxpayers to roll their gains into another QSBS investment without realizing gains or paying taxes.
This article does not constitute legal or tax advice. Please consult with your legal or tax advisor with respect to your particular circumstance.