Section 1202 offers investors a remarkable tax break: the
ability to exclude up to 100% of the gain on the sale of qualified
small business stock (QSBS). What's the catch? For one thing,
you must hold the stock for more than five years to enjoy the
benefits. And the types of stock that are eligible are limited.
However, under the right circumstances, you (or your heirs) can
sell these securities federally income-tax-free.
Brief history
Sec. 1202 was enacted in 1993. Initially, it allowed
non-corporate taxpayers to exclude from income 50% of their gain on
the sale or exchange of QSBS. The remaining 50% was taxed at 28%.
In 2003, the tax break fell out of favor when the regular long-term
capital gains tax rate was cut to 15% (20% for high-income
taxpayers).
