QSBS & Chill
Stop getting raked over the taxation coals every year. On the heels of Tax Day many of us are feeling like we paid far more than "our fair share." The types and forms of taxation in America are now legion, often leaving smart, hard-working business owners in the lurch as Tax Day approaches to round up taxes due, taxes to withhold, and taxes to anticipate. Fear not faithful readers of ILAF, we have a solution for you: Set your family up for generational wealth by harnessing QSBS!
Colloquially known as Qualified Small Business Stock (abbreviated QSBS) is rocket fuel for creating dynastic family wealth. QSBS allows founders and investors to exclude up to 100% of federal capital gains tax up to $15M or 10X basis, whatever is larger, of said stock held for over five years.
Ever wonder why the PayPal Mafia, and their descendants like Sam Altman and Dario & Daniela Amodei plus a host of others live so well with seemingly endless buckets of cash, the best real estate, the best medical care, the finest luxuries, and fly private wherever the go? Life is very sweet indeed when you do not pay taxes on massive capital gains.
Now QSBS is different than the Peter Thiel strategy of putting founders shares in a Roth IRA at $0.0001 each, ie putting 20,000,000 shares of Facebook (now Meta) in an account for $2000. That also works, obviously, but requires some specialized access along with lack of control of said company.
Qualifying for QSBS riches is relatively easy, and probably the greatest way to create dynastic family wealth that ever existed. As of July 4th, 2025 to qualify for QSBS the issuer (ie the company you invest in or start) must be a domestic C-corp with less than $75M in gross assets and the shares must be acquire at original issuance.
Now there are some key requirements to keep in mind, and it would behoove you to meet with a tax professional to line up your ducks. A couple initial considerations include the holding period, which is 5 years for the full 100% federal tax exemption, although there is a sliding scale for less than 5 years.
As discussed above, the shares need to be obtained directly from the company and not via a secondary market. Also, the "asset test" as of July 4th, 2025 under the "Big Beautiful Bill" was upped from $50M to $75M, which should be plenty large for almost any "small" business.
One of the most tricky parts of the QSBS is the actual "Q"...what qualifies as a "Qualified Business?" As you can imagine this section of the tax code (Section 12002) was written for and by the previously mentioned PayPay Mafia types for themselves. Why does that matter? Well there are some very, very valuable businesses that are explicitly excluded. Business and professions that are extremely useful to humanity including health, law, and financial SERVICES. Banking, Farming, Mining and Hospitality are also specifically EXCLUDED.
This kind of leads us to ask the question, "What businesses then actually ARE included in the QSBS carve-out?" Answer: "Those businesses that create value through products or inventory rather than primarily providing services based on employee expertise."
A little foggy? You betcha! Think along the lines of manufacturing, but both physical AND software goods (yes of course AI Agents are included...who do you think wrote this tax language? Hahaha)
Specific examples of QBs include: Technology & SaaS, Manufacturing, Manufacturing & Consumer Goods, Technology-Enabled Services, Retail/Wholesale, Research & Development.
Some complexity aside, creating the right structure and business model can potentially result in massive tax savings as many business owners with QSBS "stack" this stock amongst family members, trusts, and friends as the $15M capital gains exclusion is PER PERSON. So just when you think things can't bet better under an ideal QSBS scenario, the founder(s) stack company stock with their spouse, children, and trust(s).
If you are tired of being jerked around by a fickle tax code and seeing your tax dollars squandered away by government agencies left and right while you are grinding out hour after hour of work, consider taking advantage of Section 1202 and set your family up for generational wealth via massive tax savings.
