QSBS Tax Strategy

A strategic approach to minimizing taxes on business exits through QSBS (Qualified Small Business Stock) and state residency planning, as shared by Kevin Ryan.

Core QSBS Strategy Components

• Only work on QSBS-eligible projects
• Focus on long-term capital gains vs cash flow/income
• Live in high-cost states while maintaining tax efficiency
• Gift stock to children's trusts before financing rounds

Key Tax Benefits

• Pay only state tax (around 14%) in high-cost states like CA/NY
• No federal tax on QSBS-eligible gains
• Children pay 0% tax on their trust holdings
• Can get up to $10M tax free per person
• Potential for $50M+ tax free with multiple children

Implementation Steps

1. Set up children's trusts
2. Gift stock before raising financing rounds
   • Takes only ~$100k of lifetime gift tax exemption
   • Children now own QSBS-eligible stock
   • Timing matters - do before valuation increases

Strategy Requirements

• Must reach financial stability first to focus on capital gains
• Need to structure companies to be QSBS eligible
• Must be willing to live in high-cost state
• Requires advance planning before major financing events

Risk Considerations

• Strategy requires careful documentation and compliance
• Public discussion of tax strategies can attract scrutiny
• Need proper legal/tax guidance to implement correctly