If you hold stock in a qualified small business, you may be able to exclude part of the gain when you sell the stock. This is a provision of Section 1202 of the Internal Revenue Code, that provides for an exclusion of up to 50% of the eligible gain on the sale or exchange of Qualified Small Business (QSB) stock that is held for more than 5 years. And the taxable part of the gain is treated as a 28% rate gain.
How To Report
If you have a sale of qualified small business stock that you have held for more than 5 years, you would report the entire gain realized on the sale in the long-term capital gains section of Schedule D. Directly below the line on which you report the gain, you would enter "Section 1202 Exclusion" in column (a) and enter the amount of the allowable exclusion as a negative amount.
Rollover of Gain
If you sell stock that you held for more than 6 months, you may be able to postpone the gain by rolling it over. In order to do this you must purchase other qualified small business stock during the 60-day period that begins on the date of the sale, and this replacement stock must continue to meet the active business requirement for at least 6 months after you buy it.
If you elect to roll over the gain, you are effectively postponing the gain by adjusting the basis of the replacement stock. You make the election at the time you file your return for the tax year in which the QSB stock was sold. You would report the entire gain realized on the sale in either the short-term or long-term section of Schedule D, as applicable.
How To Report
Directly below the line on which you report the gain, you would write "Section 1045 Rollover" in column (a) and enter the amount of the postponed gain as a negative amount. This is the amount by which you would have to reduce your basis in the replacement stock.
Your holding period in the replacement stock would include the holding period of the qualified small business stock you sold, except for the 6-month holding period to qualify for the rollover.