A taxpayer who is considering the sale of certain stock may have the opportunity to exclude or defer part or all of the gain on such sale. To be eligible for the exclusion or deferral, such stock must be “qualified small business stock” (QSBS). To qualify as QSBS, the taxpayer must have acquired the stock at its original issue from a corporation with aggregate gross assets of $50 million or less. Generally, stock issued by most technology startups is a prime candidate for the potential QSBS treatment.
Under Section 1202 of the Internal Revenue Code (IRC), a taxpayer may be able to partially or entirely reduce (i.e., exclude) the gain on the sale of QSBS. Depending on the acquisition date of the QSBS, the exclusion amount can range from 50% to 100% under the current legislative framework. To qualify for the Section 1202 exclusion, among other conditions, the taxpayer must have held the QSBS for more than 5 years.
Under IRC Section 1045, a taxpayer also has the opportunity to rollover (i.e., defer) the gain on the sale of QSBS into new QSBS within 60 days after the sale. The taxpayer must have held the QSBS being sold for more than 6 months to qualify for the Section 1045 rollover.