Legal & Compliance
Qualified Small Business Stock (QSBS)
A tax provision allowing investors to exclude up to $10M or 10x their investment in capital gains from federal taxes.
Under Section 1202 of the Internal Revenue Code, gains from QSBS held for at least 5 years may be 100% excluded from federal capital gains tax (up to $10M or 10x cost basis). The company must be a C-corp with gross assets under $50M at the time of stock issuance.
In Practice
An angel invested $500K in a startup at incorporation. After 6 years, their shares were worth $5M at acquisition. The entire $4.5M gain was tax-free under QSBS, saving approximately $1M in federal taxes.
Why It Matters
QSBS is the single most valuable tax benefit available to startup investors and early employees. It makes angel investing significantly more tax-efficient than other investment types.
VC Beast Take
QSBS is the tax code's gift to angel investors. If you're investing in startups and not structuring for QSBS, you're leaving serious money on the table.
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