How to Report a QSBS Sale Using Form 8949 Code Q

When selling or exchanging capital assets, the transactions are reported to the Internal Revenue Service using Form 8949, Sales and Other Dispositions of Capital Assets. This form categorizes the details of each transaction, requiring specific information about the asset sold. To provide further clarity on the nature of a sale, the IRS uses a system of codes that taxpayers must enter on the form. These codes signify special circumstances or tax treatments that apply to the transaction.

Understanding Qualified Small Business Stock (QSBS)

Qualified Small Business Stock, or QSBS, is a class of stock that offers a tax advantage upon its sale. When you sell QSBS, Section 1202 of the Internal Revenue Code allows you to exclude a portion, or sometimes all, of the capital gain from your federal income tax. The amount of the gain you can exclude depends on when you acquired the stock, with a 50%, 75%, or 100% exclusion possible. The 100% exclusion generally applies to QSBS acquired after September 27, 2010.

For stock to be considered QSBS, the issuing corporation must be a domestic C-corporation, and it cannot be certain types of businesses like financial institutions, farms, or hotels. A financial test is that the corporation’s gross assets must not have exceeded $50 million at any time before or immediately after the stock was issued.

The corporation must also satisfy an active business requirement, meaning at least 80% of its assets must be used in the operation of one or more qualified trades or businesses. The stock must have been acquired by the taxpayer at its original issuance, not on a secondary market like a public stock exchange. This can be in exchange for money, property, or as compensation for services.

To benefit from the gain exclusion, you must have held the QSBS for more than five years before selling it. The maximum gain that can be excluded is capped at the greater of $10 million or 10 times the adjusted basis of the stock. Any gain that is not excluded is taxed, and a portion of the excluded gain could be subject to the Alternative Minimum Tax (AMT) for stock acquired before September 28, 2010.

Information and Documentation for Reporting QSBS

Before you can report the sale, you must gather the transaction details, including the exact date you acquired the stock and the date you sold it. You will also need the total proceeds from the sale and your original cost basis, which is generally what you paid for the stock.

You will need a statement or certification from the issuing corporation. This document should affirm that the stock meets the requirements of QSBS and provide evidence that the corporation met the gross assets test and the active business requirement during your holding period. While not required to be filed with your tax return, you must keep this documentation in your records in case of an IRS inquiry.

With this information, you can calculate the figures for your tax form. First, determine your total gain by subtracting your cost basis from the sale proceeds. Next, calculate the amount of your gain that can be excluded. For stock qualifying for the 100% exclusion, this will be your entire gain, up to the $10 million or 10x basis cap. If your gain exceeds this cap, your excludable amount is limited to the cap, and the remainder is a taxable gain.

How to Report the QSBS Sale on Form 8949

Once you have all your information, you can report the transaction on Form 8949. Since the gain exclusion requires a holding period of more than five years, you will use Part II of the form for long-term transactions. You will report the sale on a separate line.

In column (a), you will provide a description of the property sold, which is the name of the corporation that issued the stock. Columns (b) and (c) are for the dates of the transaction; enter the date you acquired the stock in column (b) and the date you sold it in column (c).

Next, you will enter the financial details of the sale. In column (d), enter the total sales price or proceeds you received. In column (e), enter your cost or other basis in the stock.

In column (f), you must enter the letter “Q”. This code signals to the IRS that the transaction involves the sale of Qualified Small Business Stock and you are claiming a gain exclusion. In column (g), for adjustments, you will enter the amount of your excluded gain as a negative number (in parentheses). For example, if you are excluding $50,000 of gain, you would enter “($50,000)” in this column.

Finally, in column (h), you will calculate the reportable gain or loss by combining the figures from columns (d), (e), and (g). The total from this column will then be carried over to Schedule D (Form 1040), Capital Gains and Losses. The totals from all your Form 8949 transactions are aggregated on Schedule D to determine your net capital gain or loss for the year.