Tax Glossary

Gain on the Sale of Small Business Stock

The government wants to encourage investments in small businesses. To do so, it has created certain tax breaks should these investments turn out to be profitable.

If you have a gain on the sale of small business stock, you have two options for favorable tax treatment:

1. You can roll over the proceeds into other small business stock to defer the gain. You must reinvest your proceeds from the sale within 60 days of the date of sale to complete the rollover. If you roll over less than all of the proceeds, you must report gain on the portion of the proceeds not rolled over.
2. You can do nothing and exclude a percentage of the gain from income (called a Section 1202 exclusion). The portion of the gain that is not excluded is subject to a 28 percent capital gain rate (unless your tax bracket is below this rate so that the tax rate is limited to your bracket, which is what you would pay on ordinary income). The exclusion is 50 percent of the gain (75 percent of the gain for stock acquired after February 17, 2009, and before January 1, 2011). The exclusion is 60 percent for the stock of a small corporation located in an empowerment zone.