How Small Business Stock Sales Are Taxed

Selling small business stock can have significant tax implications, depending on several factors, such as the holding period, the nature of the business, and the type of stock sold.

CAPITAL GAINS

The tax rate for selling small business stock depends on whether it’s a long-term or short-term capital gain. If you’ve held the stock for more than a year before selling, any gain will be taxed at the long-term capital gains rate, which is generally lower than the ordinary income tax rate. If held for a year or less, the gain is considered short-term and will be taxed at your ordinary income tax rate.

In certain situations, losses from selling small business stock can be used to offset other capital gains. You can offset up to $3,000 of other income if your losses exceed your gains. Any remaining losses can be carried forward to future years.

QUALIFIED STOCK

Section 1202 of the Internal Revenue Code provides a potential exclusion for gains from certain small business stock. If the stock is a Qualified Small Business Stock (QSBS) you might be able to exclude up to 100% of your capital gains from federal tax, subject to certain limitations. However, this rule only applies if you’ve held the stock for at least five years.

NET INVESTMENT INCOME TAX

Another tax implication is the Net Investment Income Tax (NIIT). If your modified adjusted gross income exceeds a certain threshold, you may be subject to an additional 3.8% tax on any net gain from the disposition of your stock.

BUSINESS SALE

If the business is sold instead of just some of the stock, the transaction could have different tax implications, depending on whether it’s structured as an asset sale or a stock sale. Tax consequences can be complex and vary significantly.

Speak with your tax professional when selling small business stock.