Investing in stocks is a popular way of growing one’s wealth. It is a relatively low-risk option as stocks have historically yielded higher returns than other investment vehicles like bonds, real estate, or gold.
One form of stock investment that has been gaining traction in recent years is investing in Qualified Small Business Stock or QSBS. In this article, we will explore the advantages of investing in QSBS.
What is QSBS?
QSBS is a tax incentive offered to investors in small businesses that meet certain criteria. The criteria are as follows:
– The company must be based in the United States.
– The company must have issued the stock after August 10, 1993.
– The company must have aggregate gross assets of $50 million or less at the time the stock is issued.
– At least 80% of the company’s assets must be used in the active conduct of one or more qualified businesses.
– The stock must be held for a minimum of five years.
Advantages of Investing in QSBS
There are several advantages of investing in QSBS. Let’s examine them one by one.
1. Potential for High Returns
Investing in QSBS can yield significant returns. If the company does well, the investment can multiply many times over. The reason for this is that QSBS is eligible for a capital gains tax exclusion.
The tax exclusion allows an investor to exclude up to 100% of the gain from the sale of QSBS held for at least five years. This means that if an investor buys $100,000 worth of QSBS and the value of the stock increases to $1 million after five years, the investor could sell the stock and exclude up to $900,000 from capital gains taxes.
2. Lower Risk
Investing in small businesses is perceived as risky, but investing in QSBS can mitigate some of that risk. The reason for this is that small businesses that issue QSBS must meet certain criteria, such as having a certain percentage of their assets tied to active business operations. This criteria helps eliminate some of the risk tied to early-stage companies that may lack a proven track record.
3. Diversification
Investing in QSBS can be a way to diversify one’s portfolio. QSBS investments can complement traditional equity investments, such as mutual funds or exchange-traded funds, which can provide investors with a diversified portfolio that spreads risk across various asset classes and sectors.
4. Tax Benefits
The tax benefits of QSBS are significant. As mentioned earlier, QSBS investors can exclude up to 100% of the gain from the sale of QSBS held for at least five years. This translates to considerable savings in capital gains taxes.
QSBS also qualifies for a federal tax exemption of up to 10 times the original investment or $10 million, whichever is greater. This exemption applies to both regular income tax and alternative minimum tax.
Conclusion
Investing in QSBS can provide many benefits to investors. The potential for high returns, lower risk, diversification, and tax benefits are all compelling reasons to consider this investment vehicle. However, before investing in QSBS, it is important to consult with a financial advisor and thoroughly research the company issuing the stock to ensure that it meets the necessary criteria and has the potential to yield a return on investment.
