--- title: "What happens if I sell my QSBS during the five-year period?" id: "413755" type: "post" slug: "what-happens-if-i-sell-my-qsbs-during-the-five-year-period" published_at: "2024-12-09T13:48:25+00:00" modified_at: "2024-12-09T13:48:25+00:00" url: "https://seedlegals.com/us/resources/what-happens-if-i-sell-my-qsbs-during-the-five-year-period/" markdown_url: "https://seedlegals.com/us/resources/what-happens-if-i-sell-my-qsbs-during-the-five-year-period.md" excerpt: "Qualified Small Business Stock (QSBS) offers a significant tax benefit for founders and early investors in startups. It could give you a 100% exemption on federal capital gains taxes, up to $10 million or 10 times your original investment amount,..." taxonomy_category: - "Uncategorized @us" --- 5 min read Expert reviewed This article has been fact-checked by a SeedLegals subject matter expert. [Meet our experts](https://seedlegals.com/us/authors-and-experts/) and learn more about our review process and quality assurance in our [editorial policy](https://seedlegals.com/us/editorial-policy/) . # What happens if I sell my QSBS during the five-year period? Published: Dec 9, 2024 Contents [If I sell before the five-year period, can I still qualify for the QSBS exclusion?](#if-i-sell-before-the-five-year-period-can-i-still-qualify-for-the-qsbs-exclusion) [1. Reinvest into another QSBS-qualifying business](#1-reinvest-into-another-qsbs-qualifying-business) [2. Start a new QSBS-qualifying business](#2-start-a-new-qsbs-qualifying-business) [3. Exchange QSBS for stock in the buyer’s company](#3-exchange-qsbs-for-stock-in-the-buyers-company) [4. Structure a delayed sale of QSBS](#4-structure-a-delayed-sale-of-qsbs) [Make sure you actually meet the requirements](#make-sure-you-actually-meet-the-requirements) [Got any questions? We’ll get them answered](#got-any-questions-well-get-them-answered) [Writer Idin Sabahipour Copywriter](https://seedlegals.com/us/resources/author/idin-sabahipour/) [Legal review Drew Macklin Founding partner of Macklin Law](https://seedlegals.com/us/resources/author/drewmacklin/) Qualified Small Business Stock (QSBS) offers a significant tax benefit for founders and early investors in startups. It could give you a 100% exemption on federal capital gains taxes, up to $10 million or 10 times your original investment amount, whichever is greater. But to fully benefit from QSBS tax relief, you’ll need to have set your company up as a C corporation and held the stock for at least five years before it’s sold. Only C corporations can issue QSBS, but a company can convert from another structure (such as an LLC or an S corporation) to a C corporation and issue QSBS (as long as the other criteria are met). Also, if you were issued stock before conversion to a C corporation, you could still benefit from QSBS on that. The gains on that stock before the conversion won’t qualify for QSBS. But gains on the stock after the conversion can qualify for QSBS (provided the company meets the other requirements). That said, what are your options if you want to sell your QSBS stock before meeting the five-year requirement – will you lose all your tax benefit? In this article, we’re going to explore some strategies that can help you achieve tax savings even if you’re planning to sell your QSBS before the five-year mark. If you want to learn more about how you can benefit from QSBS, read our guide on [QSBS for founders](https://seedlegalsdev.wpengine.com/us/resources/qsbs-for-founders/) as well as a [QSBS guide for investors](https://seedlegals.com/us/resources/qsbs-for-investors/) . ## **If I sell before the five-year period, can I still qualify for the QSBS exclusion?** The general rule in [Section 1202 of the Internal Revenue Code](https://uscode.house.gov/view.xhtml?path=/prelim@title26/subtitleA/chapter1/subchapterP/part1&edition=prelim) says that stock must be ‘held for more than 5 years’ to be eligible for the full QSBS tax relief. So, if you sell before this period, any capital gains you realize wouldn’t be eligible for QSBS tax treatment (the gain would be subject to regular capital gains tax rates). But, there are some options you should know about that let you keep some of your QSBS tax benefit. ## **1. Reinvest into another QSBS-qualifying business** Under [Section 1045 of the Internal Revenue Code](https://uscode.house.gov/view.xhtml?req=granuleid:USC-prelim-title26-section1045&num=0&edition=prelim) , if you sell your QSBS before the five-year mark, you can defer capital gains tax by reinvesting the money into new QSBS within 60 days of the sale – this is known as a ‘qualified rollover’. If it’s done correctly, a qualified rollover means you can: - defer capital gains tax until the new QSBS is sold, and - add the original holding period onto the period you hold the replacement stock (so you get the chance to meet the five-year requirement on a combined basis). For example, say you sell your QSBS after holding it for three and a half years. A month later, you use the proceeds to buy stock in another qualifying small business. By meeting the requirements under Section 1045, you can defer the capital gains tax and potentially qualify for the QSBS exclusion on the entire gain if you hold the replacement stock for at least another year and a half (because, combined, you meet the five-year holding period). While this method will ‘save’ your QSBS benefit, it can be tough in reality – 60-days isn’t a long time to find another qualifying business, do your due diligence and then actually invest in it. Any qualified rollover must take place within 60 days of the sale of the original stock. The original QSBS holding period can be added to the replacement stock holding period. ## **2. Start a new QSBS-qualifying business** Another approach is to set up your own new qualifying business within 60 days using the sale money. The benefit of this strategy is that it gives you more control – you don’t have to find an existing qualifying business to invest in. But, you do have to put genuine effort into creating a business that meets the QSBS requirements. With this method, there are a couple of things you should keep in mind: - **Legitimate investment:** The new business would need to have a legitimate business plan and a reasonable relationship between the invested funds and the business’s needs. So, for example, investing $10 million into a business that only requires $200,000 to operate could be questioned by the IRS. - **Exit plan:** This strategy only helps if the new company is able to sell its stock at some stage after meeting the five-year holding period. If the business fails, the IRS could ask questions about the legitimacy of your efforts, to see if you made a genuine attempt to create a trading business. The new business must be a C Corporation and meet QSBS requirements. For a full breakdown of the requirements, check out our [QSBS guide for founders.](https://seedlegals.com/us/resources/qsbs-for-founders/) ## **3. Exchange QSBS for stock in the buyer’s company** To the extent the sale of your QSBS is part of an early acquisition, another option is to exchange your QSBS for stock in the buyer’s company. In some scenarios, selling stockholders exchange their QSBS for stock in the acquiring company. This strategy allows you to effectively ‘tack on’ your original holding period to the new buyer stock, potentially allowing you to meet the five-year holding requirement. For example, say you hold QSBS in your own company and, after three years, your company is acquired. You exchange your stock for stock in the buyer’s company. Then, two and a half years later, you sell your stock in the buyer’s company. The two time periods can be added so you meet the five-year QSBS holding period. But your tax treatment will be different depending on whether the stock you’re receiving is QSBS or non-QSBS. If you receive QSBS, you’ll get the full tax benefit when you sell. But, if you receive non-QSBS, you’ll only get the tax exclusion on the gain that existed at the time of the exchange, not on any future increase in value. This means you’ll only get a partial benefit. So, if your gain was $5 million at the time of the exchange, and later, when you sell the new shares, you make another $5 million in profit. The first $5 million could qualify for the QSBS exclusion, but you’d need to pay capital gains taxes on the additional $5 million. Keep in mind that by taking equity rather than cash upfront, you’re taking a risk. The future gain and favorable tax treatment aren’t guaranteed, and sometimes receiving cash immediately (even if it means paying capital gains taxes) might be the better choice. ## **4. Structure a delayed sale of QSBS** If you’re really close to hitting the five-year threshold (say, just a few weeks away), you could try to delay the sale to get past that point. For example, you could sign a sale agreement with a later closing date to push the transaction past the five-year period – you could even allow the buyer to operate the business during the period until the five-year requirement is satisfied. Just be aware that delaying payments won’t work if the sale actually closes before the five-year mark. The date the IRS looks at is the closing date, not the payment date. ## **Make sure you actually meet the requirements** Selling QSBS before the five-year holding period means you’re either taking a potential tax hit or finding a strategy to preserve some of your QSBS benefits. If you’re aiming to keep the tax benefit, it’s important to work with a qualified tax advisor. They can guide you through the different options and ensure your efforts align with IRS regulations, saving you from costly errors. ## **Got any questions? We’ll get them answered** [Book a free call with our team](https://seedlegals.com/us/talk-to-us/) to find out how we can help with your fundraise. Want to try SeedLegals for free first? [Start your 7-day free trial](https://app.seedlegals.com/signup) . Get your answers fast, for free We're here to help! Bring your questions - we got the answers [Book a call](https://seedlegals.com/us/talk-to-us/) ## Related posts [6 min read How to spot the right moment to flip from LLC to C corp Not sure whether to flip from LLC to C corp? Learn the key triggers,the risks of moving too early or late, and how to ge... Idin Sabahipour](https://seedlegals.com/us/resources/how-to-spot-the-right-moment-to-flip-from-llc-to-c-corp/) [1 min read How Travel Spoken is reshaping travel planning with AI Eni Maj, co-founder of Travel Spoken, shares how the platform is turning travel content into bookable trips using AI – a... 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