How Founders and Investors Can Legally Eliminate Up to $10 Million in Capital Gains Taxes
- Anatoly Iofe
- Jun 13
- 3 min read
What Is QSBS?
Qualified Small Business Stock (QSBS) is one of the most powerful and underutilized tax breaks in the U.S. tax code. It allows founders, early employees, and investors to exclude up to 100% of capital gains—up to $10 million or more—when selling shares in certain U.S. companies.
Established under Section 1202 of the Internal Revenue Code, this benefit was created to reward those who fuel innovation and growth in small businesses. But to use it, you must plan ahead.
Who is QSBS for?
If you’re any of the following, this opportunity is for you:
✅ A founder or co-founder of a U.S. startup
✅ An early employee who received equity as part of compensation
✅ An angel investor or VC who bought original shares
✅ A family office or HNW investor focused on tax efficiency
✅ Someone preparing for an exit, M&A event, or liquidity strategy
How Much Can You Exclude?
QSBS allows you to exclude the greater of:
💰 $10 million in capital gains, or
🔁 10 times your original investment
Checklist: Do You Qualify?
Run through this quick self-check:
✅ Stock was issued by a U.S. C-Corporation
✅ You acquired the shares at original issuance
✅ Company’s gross assets < $50M at the time
✅ Stock was held for more than 5 years
✅ Company is an active business (not just a holding entity)
✅ Industry is eligible (e.g., tech, manufacturing, product-based)
❌ Not eligible industries: finance, real estate, law, or healthcare services
Case Study: A Tax-Free Tech Exit
A startup founder based in Austin received common shares in a C-Corp at inception. The company was acquired eight years later for $40 million. Because he met the QSBS criteria, he was able to exclude $10 million in capital gains, saving over $2.3 million in federal taxes.
By gifting shares to a trust and a family member before the exit, he legally stacked exclusions and shielded over $20 million in gains from tax.
Smart Planning Strategies
📈 Stack the $10M Exclusion: Gift QSBS shares to family members or irrevocable trusts (IRC §1202)
⏳ Rollover Gains (IRS §1045): If you sell before 5 years, reinvest into another qualified company to defer gains
📑 Track Documentation: Keep proof of original issuance, holding period, and C-Corp status
🏛 Integrate With Estate Planning: QSBS can significantly reduce estate tax exposure when used with grantor trusts
Avoid These Pitfalls
🚫 S-Corps and LLCs Don’t Qualify Only C-Corporation stock is eligible.
🚫 Missing the 5-Year Window Selling too soon disqualifies the gains.
🚫 Buying Stock on the Secondary Market QSBS must be purchased directly from the company.
🚫 Failing to Plan Before a Liquidity Event Waiting until M&A due diligence is often too late.
Your Next Step: Don’t Leave QSBS on the Table
If you're holding stock in a startup—or planning to exit—you may be sitting on a once-in-a-lifetime tax opportunity.
But the window to plan is narrow, and most people miss it. Let IceBridge Financial Group help you determine if your stock is QSBS-eligible and show you how to optimize your strategy.
✅ Ready to Take Action?
Sources of Information*:
*These organizations are not affiliated with IFG. IFG does not endorse, support, or recommend any information that is not provided by its affiliates or representatives.
Disclaimer:
Information provided is for informational purposes only, and does not constitute a financial advise, an offer or solicitation to sell, a solicitation of an offer to buy, any security or any other product or service. Accordingly, this document does not constitute investment advice or counsel or solicitation for investment in any security. The information in this material is not intended as tax or legal advice. Please consult legal or tax professionals for specific information regarding your individual situation.
