Most individual investors may qualify for a special tax treatment on capital gains earned from small business stocks under section 1202 of the IRS code.

1. Knowing More About the Capital Gains Tax for Investors
Most individual investors may qualify for a special tax treatment on capital gains earned from small
business stocks under section 1202 of the IRS code. An important aspect while investing is managing
how much tax you will owe on your gains. Usually taxes are overlooked or considered after the fact,
but capital gains have a big impact on investment results. As different types of capital gains are taxed
at different rates, this needs to be taken into account when making investing decisions.
While there are actually several capital gains tax savings provisions that you can take advantage of to
help you build wealth, it is important to pay attention to the type of investment you are making, how
long you plan to hold it and its tax implications before you invest.
Here’s how it usually works:
An exclusion of 50% of Capital Gains from the Capital Gains Tax Calculation
● Shares of regular C Corporations that qualify under Section 1202, bought by investors that
are not themselves corporations, that have a holding period of five (5) years or longer,
can exclude 50% of the capital gain from the calculation of capital gains tax
● This exclusion on the small business capital gains tax is limited to $10 million or 10 times
the cost basis of your shares.
● From 2003 through 2011, this benefit is of limited value because the maximum capital
gains tax on long-term capital gains profits is 15%.
The gains earned from small business stocks can be deferred under a provision in IRC Section 1045. If
you have held your shares for at least six (6) months, and you sell them, you won’t have to pay the
capital gains tax as long as you use the money to buy shares of another qualifying small business.

2. Any qualified small business is a domestic C Corporation in which the aggregate gross assets of the
corporation at all times since August 10, 1993 up to the time of issuance do not exceed $50,000,000.
However, stock will not be considered to be qualified small business stock unless during substantially
all of the taxpayer’s holding period the corporation meets certain “active business” requirements. In
general, gain from stock issued to “flow-through entities” such as partnerships and S corporations
should qualify under Section 1202.
Managing tax effects by being knowledgeable about how and where your gains are coming from can
produce even greater gains in the end. With effective tax planning, you can also get information
about the long term capital gain in India.
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