What this line means
The portion of your gain from the sale of qualified small business stock (QSBS) that qualifies for special treatment under Section 1202. Depending on when the stock was acquired, you can exclude 50%, 75%, or 100% of the gain from income. For stock acquired after September 27, 2010, the exclusion is 100% up to $10 million or 10 times your original investment basis.
Does this apply to you?
- You sold stock in a C corporation that qualified as a small business when the stock was issued
- You held the stock for more than five years
- The corporation had gross assets of $50 million or less when the stock was issued
- You acquired the stock at original issuance (not on the secondary market)
Easy to overlook
The $10 million exclusion is per issuer, per taxpayer — but the stock must be original-issue Each qualifying company gets its own $10 million cap, and married couples filing jointly each get the $10 million limit, effectively doubling it to $20 million per company. 1 The stock must be acquired directly from the issuing corporation at original issuance. Stock purchased on the secondary market — from another shareholder, through a tender offer, or on a private exchange — does not qualify, even if the company itself meets all the QSBS requirements. IRC Section 1202 — QSBS exclusion
The excluded gain still counts for the 7% AMT preference (pre-2010 stock only) For stock acquired before September 28, 2010, the excluded portion of the gain is a preference item for the Alternative Minimum Tax. The 100% exclusion for post-2010 stock eliminates this AMT preference entirely, making it fully tax-free with no AMT clawback. 2 IRS Schedule D instructions — Line 17
Watch out for this
Assuming you qualify for the 100% exclusion without verifying the acquisition date. The exclusion percentage depends on when you acquired the stock: 50% for stock acquired before February 18, 2009; 75% for stock acquired between February 18, 2009 and September 27, 2010; and 100% for stock acquired after September 27, 2010. The dates matter.
Footnotes
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IRC Section 1202, Qualified Small Business Stock Exclusion. https://www.law.cornell.edu/uscode/text/26/1202 ↩
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IRS Schedule D (Form 1040) Instructions, Line 17. https://www.irs.gov/instructions/i1040sd ↩