Now that the qualified small business stock 100% tax exclusion is going to be permanent, one question that will come up more often is:
Qualified Small Business Stock Options
Do optionees qualify? Meaning, do holders of compensatory stock options, who exercise those options and acquire stock–can they qualify for the Section 1202 qualified small business stock benefit?
The answer is yes. Stock acquired upon the exercise of compensatory stock options can qualify as qualified small business stock.
Specifically, Internal Revenue Code Section 1202 Says:
(c) Qualified small business stock. For purposes of this section—
(1)In general. Except as otherwise provided in this section, the term “qualified small business stock” means any stock in a C corporation which is originally issued after the date of the enactment of the Revenue Reconciliation Act of 1993, if—(A) as of the date of issuance, such corporation is a qualified small business, and
(B)except as provided in subsections (f) and (h), such stock is acquired by the taxpayer at its original issue (directly or through an underwriter)—(i) in exchange for money or other property (not including stock), or
(ii) as compensation for services provided to such corporation (other than services performed as an underwriter of such stock).
Of course, the biggest trouble optionees might have is not meeting the holding period requirement. But Section 1045 will be available for optionees to roll over Section 1202 gain even if they haven’t held the stock for more than five years.