QSBS Tax Benefits

QSBS (Qualified Small Business Stock) is one of the most generous tax breaks available for startup founders and early employees, allowing them to potentially pay zero taxes on millions in gains.

Core QSBS Benefits

• Pay zero taxes on up to $10M in gains or 10x your basis (whichever is greater)
• Must hold shares for 5 years
• Applies to founders, early employees, and investors
• Most states (43) recognize QSBS and charge no state taxes
• California and 6 other states don't fully recognize QSBS

Key Requirements

• Must be shares in a C-corporation
• Must be original issue shares (not secondary purchases)
• Must hold shares (not options) for 5 years
• Cannot be self-dealing transactions
• Must file proper documentation and elections

Advanced QSBS Stacking Strategies

• Each shareholder gets their own $10M limit
• Can multiply benefit through family members
  • Give shares to parents, siblings, spouse
  • Each gets their own $10M exemption
• Can create trusts for additional stacking
  • Set up trusts for future children
  • Create charitable trusts
  • Each trust gets its own $10M limit
• Must be irrevocable gifts - can't take back

Best Practices for Founders

• Give early employees shares instead of options to start 5-year clock
• Consider converting from S-corp to C-corp at higher valuation to increase 10x basis limit
• File proper 83(b) elections within 30 days
• Document everything properly for future tax purposes
• Work with experienced tax advisors who understand QSBS

Real World Impact

• Can save millions in federal and state taxes
• Example: On $10M gain in New York
  • Save federal capital gains tax (~23%)
  • Save NY state tax
  • Only pay NYC tax
• Particularly valuable in high-tax states
• One of the most impactful tax strategies for founders