When I sold some shares in my company, it sure was nice to not pay any taxes thanks to QSBS. But it’s sort of an absurd handout to rich people — I have a hard time believing investment money would flee the US if early stage investors/founders had to pay long term cap gains on their first $10M of gains (after all, we’d still have carried interest to keep the VCs happy).
It’s also already really easy to multiply the limit, by gifting stock to your spouse, kids, or a trust — all of which can be done just before you sell and keep the benefit. So raising that limit just makes it more absurd.
Though, if you’re an employee at an early stage startup and you can afford it/stomach the risk, QSBS is a good reason to exercise your options early.
It is certainly a handout to rich people, but it does serve a purpose. If you have a choice to invest in a startup vs a more stable investment, the $10M (or now $15M) in tax free gains is a strong incentive to choose the startup investment over something else.
And at the end of the day, small businesses usually drive the most innovation, so getting rich people to direct their money into startups instead of big companies is good for the country as a whole.
Having invested in 150+ startups myself, I can tell you that it definitely is for me. I would certainly put more of my money into other investments without QSBS.
This applies per person. When startup founders realize their stock is actually worth a lot they form trusts and each one gets QSBS. Each trust must be to a different person.
I personally know people who stack 5-10 trusts for as many family members as they can. This appears to give them 50% more tax-free money (10 to 15 million) per person in their trusts.
Don't forget QSBS benefits for investors. The exclusion limit is 10x invstment. If you invested $20 million (in a startup valued under $50 million), you could exclude up to $200 million in capital gains. It has to be a person, not a corporation who invests. I believe this would apply to the VCs, since you are getting money from a partnership fund. I could be wrong though.
Man I wish Canada had this. Right now it's a 1mm-per-lifetime exemption. Giving up some ability to tax startup investors would be a small and worthwhile price to pay for encouraging more business formation.
Did this actually happen? My understanding is that this was in one version of the Senate bill but the final one has now passed and I’m seeing no mention of this anywhere which makes me assume it didn’t make the final version.
Interested to be proven wrong if someone has a link but unless they do this headline might be misleading.
So it applies to a situation when you hold stock of a company that's large enough to issue stock, but is, and has always been, small enough to never have more than $50M in assets, and you must hold the stock for at least 5 years.
Fairly common for startups that go through multiple rounds of funding.
If you invest during a seed round, chances are the funding is much less than $50M. Series A usually is much less than $50M too. Series B or C might put you over the limit, depending... but that doesn't disqualify the earlier purchases.
Meeting the holding period could be easy or hard, depending on what the company does. If it takes 5+ years between when it hits the $50M limit and when the shares are marketable, most holders will have a qualified disposition. If it's acquired and the merger terms aren't well tax managed, that may be a disposition for all holders and that sets the holding period. If it becomes marketable quickly, then some holders are likely to sell at least some shares before meeting the holding period... Avoiding capital gains tax is nice, but not nice enough to forgo realizing gains when experience has shown that stock prices can drop rapidly for a variety of reasons that may be hard to forsee.
The requirement was only that you acquired the stock when the company has less than $50M (now $75M) in assets. If the company now has $1B in assets, you still get the tax exclusion up to the limit on stock that was purchased back when the company was small.
It specifically advantages investment in small companies that then turn into large companies.
not exactly. you have to acquire the stock at a time before the assets ever exceeded $50M. If the balance sheet is $51M and then goes down to $49M and then you exercise, you are not QSBS eligible.
it's that ever part that the GP got confused about. the company assets have to have never exceeded $50M before you acquire the stock, not just at the time you acquire it.
For any startup that actually reaches a sizable liquidity event of any form, it's very common.
As background: I cofounded a startup that made a lot of people millionaires. QSBS really helped a lot of people. Yeah, if you're going to make deca-millions anyways then it seems like a handout, but if you're "only" making a few million dollars it's the difference between retiring and not.
This also applies for options exercised before the company reaches $50M in assets. And then the gain from a valuation from $50M to say $1B is all excluded.
A company doesn't need to be large to issue stock. Stock was issued to all the founders as part of incorporating our company. More stock was issued when we raised money.
Its funny. Generally, people in the startup world frowned on this bill because of the cuts to essential services. Nonetheless, we’re thrilled about the expansion of QSBS. Perhaps there’s always a silver lining.
You will never find a large bill like this that is all good or all bad.
There are so many provisions that you should have mixed opinions about them. The evaluation of the bill as a whole should be whether or not the tradeoffs are reasonable.
When I sold some shares in my company, it sure was nice to not pay any taxes thanks to QSBS. But it’s sort of an absurd handout to rich people — I have a hard time believing investment money would flee the US if early stage investors/founders had to pay long term cap gains on their first $10M of gains (after all, we’d still have carried interest to keep the VCs happy).
It’s also already really easy to multiply the limit, by gifting stock to your spouse, kids, or a trust — all of which can be done just before you sell and keep the benefit. So raising that limit just makes it more absurd.
Though, if you’re an employee at an early stage startup and you can afford it/stomach the risk, QSBS is a good reason to exercise your options early.
It is certainly a handout to rich people, but it does serve a purpose. If you have a choice to invest in a startup vs a more stable investment, the $10M (or now $15M) in tax free gains is a strong incentive to choose the startup investment over something else.
And at the end of the day, small businesses usually drive the most innovation, so getting rich people to direct their money into startups instead of big companies is good for the country as a whole.
Having personally invested in 100+ startups I can say the tax benefits are never part of the calculation.
Having invested in 150+ startups myself, I can tell you that it definitely is for me. I would certainly put more of my money into other investments without QSBS.
How would taxes or any other cost not be part of the calculation? That makes no sense.
This applies per person. When startup founders realize their stock is actually worth a lot they form trusts and each one gets QSBS. Each trust must be to a different person.
I personally know people who stack 5-10 trusts for as many family members as they can. This appears to give them 50% more tax-free money (10 to 15 million) per person in their trusts.
I actually just wrote about this in more detail last week: https://mrsteinberg.com/how-to-not-pay-your-taxes-legally-ap...
Don't forget QSBS benefits for investors. The exclusion limit is 10x invstment. If you invested $20 million (in a startup valued under $50 million), you could exclude up to $200 million in capital gains. It has to be a person, not a corporation who invests. I believe this would apply to the VCs, since you are getting money from a partnership fund. I could be wrong though.
Man I wish Canada had this. Right now it's a 1mm-per-lifetime exemption. Giving up some ability to tax startup investors would be a small and worthwhile price to pay for encouraging more business formation.
Did this actually happen? My understanding is that this was in one version of the Senate bill but the final one has now passed and I’m seeing no mention of this anywhere which makes me assume it didn’t make the final version.
Interested to be proven wrong if someone has a link but unless they do this headline might be misleading.
you spooked me but indeed it's in the final version: https://www.congress.gov/bill/119th-congress/house-bill/1/te...
> Sec. 70431. Expansion of qualified small business stock gain exclusion.
'tight July 4 deadline (which is anticipated to slip further into the summer)'
Oops
So it applies to a situation when you hold stock of a company that's large enough to issue stock, but is, and has always been, small enough to never have more than $50M in assets, and you must hold the stock for at least 5 years.
How common is that?
Fairly common for startups that go through multiple rounds of funding.
If you invest during a seed round, chances are the funding is much less than $50M. Series A usually is much less than $50M too. Series B or C might put you over the limit, depending... but that doesn't disqualify the earlier purchases.
Meeting the holding period could be easy or hard, depending on what the company does. If it takes 5+ years between when it hits the $50M limit and when the shares are marketable, most holders will have a qualified disposition. If it's acquired and the merger terms aren't well tax managed, that may be a disposition for all holders and that sets the holding period. If it becomes marketable quickly, then some holders are likely to sell at least some shares before meeting the holding period... Avoiding capital gains tax is nice, but not nice enough to forgo realizing gains when experience has shown that stock prices can drop rapidly for a variety of reasons that may be hard to forsee.
The requirement was only that you acquired the stock when the company has less than $50M (now $75M) in assets. If the company now has $1B in assets, you still get the tax exclusion up to the limit on stock that was purchased back when the company was small.
It specifically advantages investment in small companies that then turn into large companies.
not exactly. you have to acquire the stock at a time before the assets ever exceeded $50M. If the balance sheet is $51M and then goes down to $49M and then you exercise, you are not QSBS eligible.
it's that ever part that the GP got confused about. the company assets have to have never exceeded $50M before you acquire the stock, not just at the time you acquire it.
For any startup that actually reaches a sizable liquidity event of any form, it's very common.
As background: I cofounded a startup that made a lot of people millionaires. QSBS really helped a lot of people. Yeah, if you're going to make deca-millions anyways then it seems like a handout, but if you're "only" making a few million dollars it's the difference between retiring and not.
Real Assets != valuation. How much in assets do you think the average tech startup holds?
This also applies for options exercised before the company reaches $50M in assets. And then the gain from a valuation from $50M to say $1B is all excluded.
Not just exercised, but bought before the company reaches $50M in assets.
IANAL but I believe the option has to be exercised before the company reaches $50M in assets—that’s when you buy the stock.
just exercised
A company doesn't need to be large to issue stock. Stock was issued to all the founders as part of incorporating our company. More stock was issued when we raised money.
I think a lot of founders dont know about it.
Its funny. Generally, people in the startup world frowned on this bill because of the cuts to essential services. Nonetheless, we’re thrilled about the expansion of QSBS. Perhaps there’s always a silver lining.
You will never find a large bill like this that is all good or all bad.
There are so many provisions that you should have mixed opinions about them. The evaluation of the bill as a whole should be whether or not the tradeoffs are reasonable.
It might benefit me someday, but that doesn't mean I'm "thrilled" about it. Government policy is about more than just getting yours.
Section 174 being revoked (for US based R&D) is probably an even larger immediate benefit.
And IMO more clearly good. QSBS, like the mortgage deduction, is good for me personally, but still questionable policy in my view.
This is such a stupid exemption. Most small businesses are not Delaware C corps, so they don't even qualify. Total handout to SV.
Not Delaware specific. Just C Corp (since they issue stock.)
Doesn't apply to California residents.
LLCs not eligible? Sad