Many federal tax laws were enacted by Congress to help encourage taxpayers to take certain actions, such as donating to charity (to ease the burden of government) or buying a house (to help the real estate market). Such is the case with the tax break for qualified small business stock, or QSBS. Congress wanted to encourage people to create and invest in start-up businesses. Starting a small business, and investing in such a start-up, can be a risky proposition. Many start-ups don’t succeed.
But if you happen to have the good fortune to invest in one that makes it big — think certain technology start-ups — and your ownership interest in the business satisfies all the rules for QSBS, then you’ve hit the tax jackpot. Up to $10 million of your gain when you sell the stock is excluded from your income for federal income tax purposes.
