QSBS could save early employees and investors millions—but timing is everything.
Startup equity comes with plenty of upside—and plenty of questions.
How long should I hold my shares?
Should I exercise my options early?
If I sell in a secondary, what are the tax consequences?
For early employees and investors, one of the most powerful tools in the startup playbook is also one of the least understood: Qualified Small Business Stock (QSBS). Done right, QSBS can eliminate up to 100% of your federal capital gains tax, up to $10 million per company.
But to take advantage, you need to know the rules. And you need to plan ahead.
This article breaks down how QSBS works, why it matters, and how you can pair it with secondary liquidity events, like those offered on Augment, to unlock startup wealth more strategically.
QSBS is a section of the U.S. tax code—specifically, IRC Section 1202—that offers major tax savings for investors and employees who hold startup stock.
Congress introduced it to encourage investment in small businesses. The incentive: if you buy or receive stock from a qualified startup and hold it for five years, you can exclude the greater of $10 million or 10x your original investment from federal capital gains tax when you sell.
That means a founder, early employee, or angel investor could potentially sell startup equity and owe $0 in federal tax on the gain.
QSBS only applies if both you and your company meet certain criteria at the time the stock is issued: