Product education

Get notified about potential QSBS tax savings with Carta

April 25, 2023
The Carta Team

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.

Learn how Carta Tax Advisory makes it easier than ever for companies and employees to understand QSBS status—and take advantage of potential tax savings.

Seamless QSBS status evaluation: How it works on Carta

As part of the 409A valuation process, Carta’s valuations analysts will do a preliminary review of your latest information to determine whether certain shares of your company may qualify for QSBS treatment. Then, we automatically send notifications to potentially eligible stockholders and equity administrators 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 which ones may be eligible for the QSBS tax exclusion.

QSBS attestation letter

The Carta Tax Advisory team goes one step further than notifying you of potential QSBS eligibility. Our valuations team conducts an in-depth review to confirm QSBS eligibility. If eligibility is confirmed, we’ll deliver an attestation letter within five to seven business days. Shareholders can then keep a copy of the attestation letter when claiming the QSBS exclusion as evidence of eligibility.

Carta’s Equity Tax Advisors can also help your employees understand QSBS and guide them through QSBS tax decision-making processes via unlimited 1:1 sessions and company-wide webinars.

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 by offering potential tax savings of up to 100% federal capital gains tax exclusion. 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 potential tax advantage, which can foster more economic growth for small businesses and startups. We recommend talking to a Carta Equity Tax Advisor before making any tax decisions 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

A company is known as a qualified small business when it meets the below qualification requirements:

  1. The company must be an active business that is incorporated as a U.S. C-corporation.
  2. The company must have had gross assets of $50 million or less at all times before and immediately after the equity was issued.
  3. The company must not be on the list of excluded business types, which is determined by the IRS.

See QSBS eligibility in action

All stakeholders are also automatically notified by Carta via email and in their dashboard as to whether 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.

Tax Advisory customers will have the ability to schedule 1:1 sessions with Equity Tax Advisors to model tax scenarios and get help filing their taxes.

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 Potential 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 may qualify as QSBS right now, but the second grant may qualify after five years. 

When they are ready to file taxes, Casey should obtain a QSBS attestation from the company to confirm eligibility. They can also book a 1:1 session with a Carta Equity Tax Advisor to get help with the process.

How to take advantage of QSBS eligibility

QSBS-eligible stock owned for five or more years can provide a major tax advantage: no taxes for capital gains.* This extends to long-term capital gains taxes, which can be up to 20% depending on your income.

*The 100 percent exclusion only applies to stock acquired during certain periods in 2010 and thereafter. The exclusion for shareholders of stock issued between 1993 and 2010 will see a tax benefit of either 50% or 75%.

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DISCLOSURE: This communication is on behalf of eShares Inc., dba Carta, Inc. (“Carta”). This communication is not to be construed as legal, financial, accounting or tax advice and is for informational purposes only. 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. ©2021–2023 eShares Inc., d/b/a Carta Inc. (“Carta”). All rights reserved. Reproduction prohibited.