Business Ownership 1-5 Years: Long-Term Gains and QSBS Planning

You've held your business long enough for favorable long-term capital gains rates, but QSBS exclusion requires five years. Evaluate if waiting is worth it.

Long-term rates apply. Under IRC Section 1(h), gains on assets held longer than one year are taxed at 0%, 15%, or 20% depending on your taxable income, plus the 3.8% Net Investment Income Tax if applicable. That is a significant improvement over ordinary income rates, which top out at 37%.

QSBS exclusion requires five years. Section 1202 can exclude up to $10 million (or 10x your adjusted basis) in gain from the sale of qualified small business stock -- but only if you held it for at least five years. If you are within a year or two of the five-year mark, the math on waiting can be compelling.

Other planning tools still work. Installment sales, charitable remainder trusts, and Opportunity Zone deferrals under Section 1400Z-2 are all available regardless of holding period. These can reduce or defer the tax hit meaningfully.

The tradeoff: You have the favorable long-term rate, but you may be leaving the QSBS exclusion on the table. If the stock qualifies and the five-year mark is close, a CPA can calculate exactly how much waiting would save.