How It Works
Section 1202 allows founders and early investors to exclude up to $10 million (or 10x their basis) in capital gains from the sale of Qualified Small Business Stock. The stock must be held for at least 5 years and the company must meet specific requirements at the time of issuance.
Who Qualifies
- C-Corporation shareholders (original issue stock)
- Company gross assets under $50M at issuance
- Active business requirement (no passive investments)
- 5+ year holding period
Key Requirements
- Stock must be C-Corp (not S-Corp or LLC)
- Original issuance (not secondary purchase)
- Company must meet gross asset test
- Active business requirement must be maintained
Documentation Needed
Stock certificates, corporate records showing qualification, asset documentation at issuance, holding period records.