What is Carta’s New “QSBS tag” for Securities?


It’s no secret to anyone looking close enough that startups in the tech industry are growing exponentially. In response to this thriving startup ecosystem, many venture investment groups have been created to aid investors in managing their investment capital. 

One tech startup company turned investment platform is Carta (formally founded as eShares, Inc. in 2012). Carta’s meteoric rise in the tech industry, mixed with its roots in equity management, has allowed the company to see shifts in the tech investing market and adjust accordingly. This ability to see a need and provide solutions has been the foundation of Carta’s successful start and continued growth.  

Carta and Investment in the Private Market

In February 2020, Carta introduced their own investment vehicle called Carta Venture. The creation of this corporate venture addition helps put investment capital to use in growing the startup market and it is also using investment capital as an enzyme to fuel particular firms and industries that could expand Carta’s platform reach. James McGillicuddy, who is facilitates strategy at Carta, explained in an interview with TechCrunch

“[Carta Ventures’] first priority is helping folks think through how to leverage our platform to build things that we think should exist, that we don’t have expertise [in].”

Along with that, Carta continued to build upon its platform resources and reach in February 2021, when the company launched its own private stock market called CartaX. Carta’s Vice President of Product, Adrian Facini, concisely described the innovative addition to the Carta platform as follows: 

“The CartaX marketplace offers privately held companies the opportunity to leverage liquidity solutions tailored to their unique needs and goals, while also right-sizing the disclosure obligations and providing transparency into and control over the network of institutional and other sophisticated investors buying and selling their stock. In this way, CartaX builds upon the innovations of the past three decades, to deliver a liquidity solution that addresses the needs of today’s private companies, their investors, and their employees.”

Carta and QSBS

Staying in stride with their stance on preemptive planning, Carta has recently designed a QSBS badge indicator for their members. The product is designed to help companies and investors identify if their shares may be eligible for the QSBS tax exclusion. This new feature delineates whether shares are potentially QSBS eligible, with a clear tagging indicator that marks the shares based on certain criteria. 

While new features are always exciting, this new QSBS tag feature has many Carta members and investors asking two key questions:

  1. What is QSBS?

QSBS stands for Qualified Small Business Stock and provides up to 100% exclusion of Capital Gains taxes. The QSBS regulations are in Internal Revenue Code (IRC) Section 1202. It includes criteria for a corporation to qualify as a Qualified Small Business and the criteria for an investor to determine how much of their gain may be eligible for tax exclusion.

In order for a stock to be eligible, a company must meet certain criteria including:

  • The company must be a domestic C-corporation.
  • The company must have less than $50M in gross assets.
  • The company must be active in a qualified trade.
  • The stock from a qualified company must be directly issued by the company and must be held for five years. 

Once these requirements are met, the shareholder may be eligible for favorable taxation in the event of a capital gain. 

  1. Why is this new Carta tag indicating QSBS eligibility important to my company and my investments?

This question is important for founders and investors to address before embarking on potential business ventures. Identifying which securities in an investment portfolio are QSBS qualified and eligible is the first step to better QSBS management over the lifetime of venture investments. 

Once potential QSBS eligibility has been identified, it is crucial for companies and investors to collect and maintain proper supporting documentation so QSBS tax exemptions can be claimed correctly. Carta’s new QSBS tagging process was created to alert companies and investors that their shares may qualify for QSBS tax exemptions. As with all things as critical and complex as tax codes, a deeper level of analysis is necessary to be confident in claiming QSBS tax exclusions.

Claiming QSBS with Confidence

QSBS eligibility and qualifications have many nuanced complexities that can be challenging to traverse for both founders and investors in the startup ecosystem.

That’s why our team at QSBS Expert is here to help Qualified Small Business founders and investors maximize their capital tax exemptions while also navigating the parameters set forth by Section 1202 in the IRS Tax Code. Our team is ready to manage compliance over the lifetime of your eligible stock. 

Along with that, shareholders and their tax advisors must be confident that they can adequately monitor eligibility and maintain supporting documentation to ensure proper tax exemptions and in the case of an audit. In response to that need, the CapGains platform is designed to help answer pertinent questions that ensure your shares are QSBS qualified and eligible. This includes whether or not the company issuing the stock was a Qualified Small Business at the time of issuance.

Learn more about how the CapGains platform can proactively track and monitor your company’s QSBS and other tax incentive eligibility.

This article does not constitute legal or tax advice. Please consult with your legal or tax advisor with respect to your particular circumstance.

About QSBS Expert

QSBS Expert was founded by a group of entrepreneurs, investors, accountants and lawyers who came together when trying to navigate a QSBS situation of their own. We quickly realized that the regulations left a lot of open questions and the publicly available information was confusing to sift through…so we thought that others may also benefit from having a “go to” resource for all things QSBS.