Gain Without Pain: Qualified Small Business Stock and Section 1202 of the Internal Revenue Code | Smith Anderson

With the prospect of an increase in capital gain income tax rates looming on the horizon, what could be more welcome than an exclusion of 100% of gain from income? That is exactly what Section 1202 of the Internal Revenue Code provides to certain sellers of qualified small business stock.

Exclusion of Gain

Section 1202 permits taxpayers, other than corporations, to exclude 100% of any gain from the sale of qualified small business stock (“QSB stock”) held by the taxpayer for more than five years. The 100% exclusion applies to QSB stock acquired on or after September 28, 2010, and that vintage QSB stock is the focus of this Alert.

(A note on QSB stock issued before September 28, 2010: Section 1202 provides for a 50% exclusion for QSB stock acquired on or after August 11, 1993 and before February 18, 2009 and a 75% exclusion for QSB stock acquired on or after February 18, 2009 and before September 28, 2010. There is a 28% capital gain rate with…

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