Section 1202 / QSBS
A tax provision allowing up to $10M in capital gains from qualified small business stock to be tax-free.
Definition
Section 1202 of the Internal Revenue Code allows individuals to exclude from federal income tax up to the greater of $10M or 10x their basis in Qualified Small Business Stock (QSBS) upon sale. To qualify, the stock must be original-issue stock in a C-Corp with less than $50M in gross assets at the time of issuance, held for at least 5 years, and the company must be in an active trade or business. This provision can save millions in taxes on startup equity.
Why it matters
QSBS is one of the biggest tax benefits available to startup employees. If your shares qualify, you could exclude up to $10M in gains from federal tax. This requires holding for 5+ years and the company being a C-Corp with less than $50M in assets when your shares were issued. Consult a tax advisor to confirm eligibility.
Example
You exercise options at $1/share when the company has $30M in assets (qualifies as QSBS). You hold for 5+ years and sell at $100/share. On 100,000 shares, your $9.9M gain is potentially 100% excluded from federal capital gains tax, saving roughly $2M.