QSBS (Qualified Small Business Stock) is stock in a domestic C-corporation that meets specific criteria, entitling the holder to exclude up to 100% of gain on sale under Section 1202 of the Internal Revenue Code.
Why It Matters
QSBS can be a significant tax benefit for VC funds investing in early-stage companies. If the requirements are met, the gain exclusion eliminates federal capital gains tax on qualifying exits, materially improving after-tax returns for investors. Tracking QSBS eligibility requires careful attention to both the portfolio company's characteristics at the time of investment and the fund's holding period.
Key Details
- The company must have gross assets of $50 million or less at the time of issuance.
- At least 80% of the company's assets must be used in an active qualified trade or business.
- The investor must hold the stock for at least five years.
- Stock must be acquired at original issuance, not purchased secondarily.
- Certain service businesses (health, law, engineering, financial services) are excluded.
Capital Company tracks QSBS eligibility at the portfolio company level and reports qualifying gains on investor K-1s as part of fund tax administration.
This content is for informational purposes only and does not constitute legal, tax, or compliance advice. Consult qualified counsel for guidance specific to your situation.