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February 24, 2024 | read

Qualified Small Business Stock – 5 Year Hold Period

Brandon Hall

Qualified Small Business Stock – 5 Year Hold Period

The 5-year hold period for QSBS stock starts upon the issuance of stock. A taxpayer who receives stock options as a form of compensation has not received stock until the taxpayer exercises those stock options.

On the other hand, in regards to Restricted Stock Units (RSUs), stock is deemed issued when the RSU is originally granted.

IRC Section 1202 “For purposes of this subsection, the term “eligible gain” means any gain from the sale or exchange of qualified small business stock held for more than 5 years.

(1)Except as otherwise provided in this section, the term “qualified small business stock” means any stock in a C corporation which is originally issued after the date of the enactment of the Revenue Reconciliation Act of 1993

TC Memo 2010-15 (Feb. 1, 2010), the Tax Court acknowledged that there is no authority interpreting the term “stock” under the Code Sec. 1202 rules (the QSBS rules). However, the court denied the taxpayer relief based on statutory construction, concluding that it would not extend the term “stock” beyond its plain meaning to include stock options, citing D.E. Gantner, 91 TC 713, Dec. 45,108 (1988). The Tax Court then focused on the Omnibus Budget Reconciliation Act of 1993 (which added Code Sec. 1202). The Act states that the description of the gross assets test providing that the $50 million calculation is determined “at the time of exercise … and the holding period of such stock is treated as beginning at that time.” [H. CONF. REPT. 103-213, at 526 (1993), 1993-3 CB 393, 404.] According to the Tax Court, this meant the original issuance contemplated by Code Sec. 1202 would be the issuance of stock upon exercise of the taxpayer’s options.

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