Question: I heard if my stock is a qualified small business stock and hold for 5 years, I can exclude 100% of the gain up to 10 Million from income when I sell the stock, is that correct? If I gift the stock to my relative, will stock still qualify?
Answer: Qualified Small Business Stock are stock issued by qualified domestic C Corporation, obtained as part of the original issuance and held for more than 5 years. Detailed requirement to qualify as QSBS see IRS section 1202.
If the stock is a qualified small business stock obtained after 9/28/2010 and you can exclude 100% gain from taxes when you sell the stock after 5 year holding period. The exclusion has a 10 million(or 10 times of stock basis, whichever is bigger) limitation(MFJ)
When you gift the QSBS, the transferee is treated as if he acquired the stock the same manner and timing as you. Therefore, the stock will meet the same QSBS requirement and also the holding period starts the date when you acquired the stock.
However, IRS has not make it's position clear whether the transferee has a seperate 10 million gain exclusion or not.
You also need to be aware of possible gift tax ramifications.
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Circular 230:The articles are for general information only. In accordance with IRS Circular 230 they are not considered tax opinions for purposes of relying on such statements in any challenge of the reporting of the above transaction by the IRS. If a full tax opinion is required certain procedures must be met . Also there is a significant cost for a full tax opinion to meet the requirements of Circular 230.