Get notified about potential QSBS tax savings with Carta

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Taxes on equity in private companies can be complicated—and, often, expensive. But there’s one piece of the tax code that exists to make startup shares more affordable. The qualified small business stock (QSBS) exclusion offers capital gains tax advantages to shareholders of startups that meet the IRS requirements.

Carta takes the guesswork out of determining QSBS eligibility by automatically analyzing your company after a new 409A valuation. If your stock qualifies, we notify all eligible stockholders—founders, investors, and employees—via email and in their Carta dashboard.

Seamless QSBS status evaluation

As part of the 409A valuation process, Carta’s valuations analysts review your latest information to determine whether certain shares of your company may qualify for QSBS treatment. Then, we automatically send notifications via email and dashboard alerts. 

  • Equity administrators are informed if their company may meet the necessary requirements to be a qualified small business. 
  • Shareholders are informed when their shares may be eligible for QSBS status. If a shareholder has multiple equity grants on Carta, we’ll show you which ones may be eligible for the QSBS tax exclusion.

Why does QSBS eligibility matter?

The QSBS exclusion is an amendment to the U.S. tax code that rewards those who put in effort and investment to help build startups. It’s a way the system encourages and rewards risk-taking, and it’s recently been a topic of discussion as Congress weighs reducing its scope.

By increasing awareness of QSBS status, more equity owners can take advantage of this unique tax advantage, which can foster more economic growth for small businesses and startups. We still recommend seeking professional legal or tax advice before actually selling any shares because everyone’s financial situation is unique.

QSBS requirements for stockholders

The QSBS exclusion exempts federal capital gains taxes when you sell your shares if the following three conditions are met:

  1. You received equity in a private company that meets the below requirements
  2. If you were granted options, you have exercised them so that you have shares of stock
  3. You’ve held the shares of stock for at least five years

Requirements for companies

Beyond those individual requirements, the company that issued the stock must also meet all four of the following conditions to receive a qualified small business (QSB) status:

  1. Its gross assets were $50 million or less at the time the equity was issued to the stockholder
  2. It’s still an active business
  3. It’s registered as a C-corp
  4. It doesn’t operate in an excluded industry, such as banking, restaurants, or consulting

How it works

Companies are automatically assessed for QSBS status of their issued equity every time they request an annual 409A valuation. If the company’s issued securities may be QSBS-eligible, equity administrators for a qualified small business will be able to see the QSBS status of every certificate in their cap table. 

See QSBS eligibility in action:

 

All stakeholders are also notified automatically by Carta via email and in their dashboard, whether or not their equity may have QSBS status. Shareholders will see a banner in their portfolio as well as one of two tags in their dashboard: either “QSBS eligible” or “QSBS.” Which tag they see depends on how long they’ve held their shares after exercising. 

QSBS eligible QSBS
Holders of certificates issued by a QSB who have not satisfied the five-year holding period Holders of certificates issued by a QSB who have satisfied the five-year holding period

Here’s how that looks on the Carta dashboard: 

Carta dashboard shows a QSBS Eligibility Tax Benefit banner, options overview, and vesting schedule chart displaying the number of shares vested by date.

A table shows a common share with a 09/04/2017 issue date and a "QSBS eligible" tag. The table also includes share class, purchase date, shares, and cost.

A table shows an RSA certificate with a 08/25/2016 issue date and a "QSBS" tag. Table includes certificate, type, status, issue date, shares, & cash cost.

When you expand to view the stock certificate, a new “QSBS status” field will show you for how long you’ll need to hold onto your shares for you to benefit from the QSBS exclusion if you were to sell the stock. 

QSBS example

To illustrate how this works, we’ll use an example company: Meetly. Casey is a longtime employee who has been issued three stock option grants: one from when they first joined the company back in 2012, one they received after a few years at the company in 2015, and one in 2019. Casey exercised their first two grants in 2015 and 2019 when their shares vested.

The QSBS exemption status for each of Casey’s stock grants depends on both Meetly’s gross assets at the time of issue and how long they’ve held shares of stock. Only the first set of shares qualifies as QSBS right now, but the second set may qualify in 2024. 

Grant issue date Shares vested date Meetly’s gross assets (at time of exercise) Status QSBS status
January 2012 January 2015 $30 million Exercised in 2015 QSBS
January 2015 January 2019 $45 million Exercised in 2019 QSBS eligible
January 2019 January 2022 $150 million Not exercised Not QSBS eligible

Casey’s QSBS exemption status for each of their stock grants depends on both Meetly’s gross assets at the time of exercise and how long they’ve held the stock. Only the first equity grant qualifies as QSBS right now, but the second grant may qualify after five years. 

If Casey (like many startup employees) doesn’t have access to a lawyer or tax advisor, they might not know the right questions to ask about QSBS. As a stockholder, they could miss out on significant tax savings. Carta makes it easy for Casey and their employer to track the tax status of their stock. 

How to take advantage of QSBS eligibility

With QSBS information easier to see, the equity owners in your company can have more informed discussions with their tax advisors. QSBS-eligible stock owned for five or more years can provide a major tax advantage: no taxes for capital gains—not even long-term capital gains—which can be up to 20% depending on your income.* 

If your company is not already using Carta for your 409A valuations, now is a great time to join. 409A valuations are included in your Carta subscription cost, and the QSBS assessment is free for all 409A customers. (If you’re an employee, ask your company’s equity administrator if your company subscribes to Carta’s 409A valuation service so you can better understand if your stock is eligible for this tax benefit.)

*Note that shareholders of stock issued between 1993 and 2010 still see a big tax benefit from QSBS, but not zero taxes—the exclusion will either be 50% or 75%. 

This article was originally published on November 18, 2021.

DISCLOSURE: This communication is on behalf of eShares Inc., d/b/a Carta Inc. (“Carta”).  This communication is for informational purposes only, and contains general information only.  Carta is not, by means of this communication, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services.  This publication is not a substitute for such professional advice or services nor should it be used as a basis for any decision or action that may affect your business or interests.  Before making any decision or taking any action that may affect your business or interests, you should consult a qualified professional advisor.  This communication is not intended as a recommendation, offer or solicitation for the purchase or sale of any security. Carta does not assume any liability for reliance on the information provided herein. ©2021–2022 eShares Inc., d/b/a Carta Inc. (“Carta”). All rights reserved. Reproduction prohibited.

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