Tax Free Gains


Connecting Investors to Startups for Tax Free Growth



qualified Startup Investment can eliminate capital gains tax



In 1993, Congress created a powerful tax incentive to fuel innovation and job creation by allowing investors to avoid capital gains taxes when backing qualified small businesses. By investing early in qualified startups, visionary investors can potentially eliminate up to $10 million or 10x their investment in capital gains taxes after holding shares for five years. This game-changing tax benefit has helped launch iconic companies by attracting smart capital to ambitious founders building the next generation of technology and innovation.





Today, Qualified Small Business Stock (QSBS) continues to align the interests of bold entrepreneurs and strategic investors, creating a winning formula for building valuable companies while potentially eliminating capital gains taxes.



How Startups Qualify for Tax Free Gains



Active Business Structure



The company must be a domestic C-Corporation actively engaged in a qualified trade or business. This excludes service-based businesses like consulting firms, as well as banking, investing, hotels, restaurants, and farming.



Gross Assets Requirement



The corporation's total gross assets must not exceed $50 million when the stock is issued and immediately after. This includes cash contributions from the current round of financing.



Original Issuance



Investors must receive their shares directly from the company as original issuance stock, not through secondary sales.



Business Reinvestment



At least 80% of the corporation's assets must be used in the active conduct of one or more qualified trades or businesses. This means putting investor capital to work in core business operations and growth.



*not* qualifYING trade or business



Here are the key business types that do not qualify for QSBS tax benefits:

• Any professional service business where the company's primary value comes from reputation or employee skill, including law firms, medical practices, consulting firms, financial advisors, architects, and engineering service providers (though product-focused engineering companies may qualify)

• Financial businesses including banking, insurance, financing, leasing, investing, or similar activities. This extends to fintech companies where the primary business model revolves around financial services

• Farming and natural resource extraction businesses, including the operation of farms, mines, oil and gas wells, or other businesses focused on extracting natural resources from the earth

• Hotels, motels, restaurants, and similar hospitality businesses where income is primarily generated from customer services rather than proprietary assets or products

• Any business where more than 10% of the net value of its assets consists of portfolio stock or real estate holdings not used in active business operations



Tax Free Gains



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