Qualified Small Business Stock (QSBS) Exclusion refers to a tax provision under Section 1202 of the Internal Revenue Code that allows investors to exclude a significant portion of the gains from the sale of stock in a qualified small business from federal income tax.
To qualify for the QSBS exclusion, the stock must meet specific criteria, including:
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The issuing company must be a domestic C corporation with total assets not exceeding $50 million at the time of issuance.
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The stock must be acquired at its original issue and held for more than five years.
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The business must actively engage in qualified trades or businesses, such as manufacturing, retail, or certain types of service industries.
If these requirements are met, an investor can exclude up to 100% of the capital gains from the sale of the QSBS, subject to certain limits, thus providing a tax incentive for investing in small businesses. For example, if an investor purchased $100,000 of QSBS and sold it for $1 million after five years, they could potentially exclude a substantial portion of that gain from taxation.
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