To entice its citizens to back start-ups, our government is offering big tax breaks.
Today, we’ll show you three “tax hacks” for early-stage investors.
You’ll get all the profit potential that early-stage companies offer...
And you can save at least 25% on your next tax bill.
Tax Hack #1 – Own This Special Stock
When you invest in the stock market, you’re buying a company’s “common stock.”
But with private companies, you can own what’s called Qualified Small Business Stock, or “QSBS” for short.
Stock is considered QSBS if the business is worth less than $50 million at the time you invest.
Check out the deals in your Monday newsletter from Crowdability: nearly all of them are valued at less than $50 million, so you’d be buying QSBS.
And here’s why it’s so important to own QSBS:
Let’s say that one of your start-up investments gets acquired or goes public sometime down the road, netting you a windfall of profits.
Normally, you’d have to pay at least 25% capital gains tax on that investment.
But if you own QSBS, you can avoid paying taxes altogether.
By rolling your profits into another QSBS investment.
Basically, if you invest your profits from one startup into another startup, you won’t pay any taxes on the initial gain.
Tax Hack #2 – Be In It for the Long Haul
QSBS provides another important tax break...
If you’ve held your QSBS stock for at least 5 years, you can avoid taxes on 75% to 100% of your gains.
For example, let’s say you invested in a start-up back in 2010.
At the time, it was worth just $5 million – so you owned QSBS.
Now fast-forward to today:
Let’s say you sell your stake for a profit of $100,000.
Since you had a five-year holding period, you might only have to pay taxes on $25,000 of that gain – and possibly even less.
Tax Hack #3 – Bigger Breaks Coming
One of the most exciting “tax hacks” is still making its way through Congress.
It has the potential to be even more impactful than QSBS.
You see, for QSBS tax incentives to work, your investment needs to yield a profit.
But a new bill called the “Angel Tax Credit” (more formally known as “House of Representatives Bill, H.R. 4931”) can lower your tax bill regardless of profits.
If the bill passes in its current form, you’ll be able to deduct up to 25% of your total angel investments from your tax bill.
So, for example, if you invested a total of $50,000 into start-ups this year, you’d be able to lower your tax bill by $12,500 at year-end (25% of the $50,000).
It Makes Dollars and Sense
We love tax breaks like these because they:
- Incentivize us to invest in the future of our country
- Give us an immediate way to save money
- And we still get all the upside potential that comes from early-stage investing