As someone who stands to make a bunch of money from this exemption if things work out (I have a pile of qualifying stock from a YC top 50 unicorn), I agree. I think I would end up paying literally $0 in tax for no good reason (my state has no income tax).

There is a good reason. The government wants to incentivize people to make long term investments into certain types of small businesses. You are very free to disagree with that, but the government often uses the tax code to encourage/discourage certain types of investment.

Also given that you have an investment that qualifies, it seems like it is an easy thing, but it’s a pretty narrow exception. It is a giveaway to the rich in the sense that any stock based tax incentive is a giveaway to the rich, but there are a lot of giveaways to a lot of people in the tax code.

Exactly. If the tax rate on capital gains is excessive, what's my incentive to invest in a small startup? Its extremely risky as it is, but without this, parking my cash in my brokerage account becomes all the more likely.

Is there a big problem with investors not being incentivized to invest in startups? I’m not really hooked into things these days but pre-pandemic seemed like probably the best time in history to raise money as an early stage startup and I can’t imagine that reducing or taking away QSBS would meaningfully affect that. VC firms seem to be doing just fine.

If you're investing in startups because its your hobby, as many do, no tax break is going to change that.

As for others, if you're looking for returns and have the option to be an LP in a VC, make angel investments, or just park your money in the S&P500, a few of those options look more promising. While everything does have inherent risk, it is an added benefit to angel investing that you get QSBS, while being an LP or investing in the S&P necessarily don't have the same tax benefits. Incentivizing investment in small & new businesses is probably a better thing than just having the ultra wealthy invest in AT&T.

Just be aware that if you invested via a convertible note, that the QSBS holding period may not start until that note converted into stock - particularly if the note had any debt-like features like interest payments.

Very few employees end up taking advantage of QSBS, its really only investors & the founders, as you actually have to purchase and hold your shares. For early employees who are typically given options, buying your options, even early, can be an expensive and costly bet to take advantage of a tax break many years down the line.

I got lucky as an early employee (first engineering hire) who got stock rather than options. I’m not sure how typical it is but I think they didn’t switch to option grants until about a year after I started, though granted they we’re still quite small probably sub-20 employees at that time.

I’m very relieved not to be holding options. I got kind of burned by them on my first job. I was forced to sell on the secondary market as they were expiring and I wasn’t willing to take that bet (which was the right choice given the information I had at the time IMO) but they IPO’d a year or so later and are currently sitting at ~4x the price I got. Still, I’m lucky to have walked away with anything.

Is this true though? In my cohort of early-ish employees that went through a modest IPO, there was definitely some discussion of QSBS in an ex-employee group. That's where I even found out about it, in fact. Buying options (years after company was formed, mind you) was a bet on the company, not on some tax breaks down the line. Holding on to the shares for multiple years after the IPO, now that's definitely a QSBS bet (and still unclear whether a good one, given stock market volatility).

Out if curiosity, how did you invest in a YC company so early? Did you have a personal connection to that particular company or were looking to invest in startups?

I got them as grants as an early employee. I think they switched to option grants maybe around 20 employees.

Yeah qsbs is totally nuts but I'm not complaining.

I mean you can also move to Puerto Rico for the majority of the year you sell and also have 0% capital gains for federal income tax (and PR tax) purposes, under act 60. It’s got to be your only US address though.

I live abroad. Can I move to Puerto Rico so that it becomes my in-USA home and then go back abroad and live outside the US almost all of the year, and then pay 0% capital gains in the USA because my US tax home is Puerto Rico?

I have some friends in PR for Act 60 that say yes to that

Based on what their Act 60 specialists say

As this matches my plan as well

But you should consult the specialists

You know you can always write a check to the IRS? I don't think they'll complain about free money.

The parent poster doesn't want to be the only one in the country writing checks for extra money to the IRS.

The parent wants equitable tax policies that apply to everyone.

Looking at it in hindsight it looks like a giveaway, but since most startup investments fail and return absolutely nothing, this just changes the odds to make investing in startups less risky. There would be much less startup capital around and people would just buy mutual funds in mega corps if it wasn't for this tax break.

I upvoted you and would agree that encouraging creativity, new enterprise formation and investment in new ideas are all positives that the policy is chasing.

I think this policy is not a very effective means to that end. QSBS does not reduce the probability of startup failure. You can increase the financial rewards of startup success, but at a certain point this becomes less-and-less effective, because of risk aversion, and because of the declining utility of money.

This is why I say it is a give-away. Because in most cases it won't change the calculus of starting/investing in a startup from "not worth it" to "worth it." It just changes how rich the founder/investors are in the case that the startup succeeds.

I reflect on my own experience: the existence or non-existence of QSBS did not and would not have any bearing on starting my own business. This is of course N=1, so take it with a grain of salt.

I would just conclude by saying: QSBS is not a give-away only if it changing behavior. I'm not sure I believe that it actually changes startup or investing behavior.

I will grant that my experience is as a founder, and not an investor. It's more plausible that investors, who can diversify their investments, would have their behavior affected by QSBS. QSBS changes expected value of investment, though I have no idea how much early-stage investors can calculate that.

I also don't subscribe to the theory that more investment entails more creativity and innovation. I suppose that's a founder-biased point of view.

I primarily have a different perspective on taxes, which adds to the consensus making in this country.

To me, the goal of taxes is not for everyone to resent their neighbors because the levies are not even. The goal of taxes is not to stuff the state’s coffers, as no amount of taxes will balance its budget and what it does collect only pay interest on the stuff it already built. So there is no roads and schools argument to paying an arbitrary “fair share”. The goal of taxes - and this seems to match reality - is to incentivize certain kinds of transactions. If certain kinds of transactions are done throughout the year, the government leaves the remaining earnings that year alone, if they aren't it acts as the steward for a portion of the remaining.

The primary goal of macroeconomic policy for the last decade has been to convince people to move money into shares of more founders, with the hope that the founders spend heavily on goods and services to make their thing work. Velocity of money is more important for the economy’s growth, than the idea of taxes. This entropy of spending is far greater than individual consumers or the monolithic ideas of a government entity spending. This has also been largely unsuccessful, as people simply dont want to give random founders money. So the governments desperate attempt to further incentivize making it happen anyway via a tax exemption is congruent with the idea.

> The goal of taxes - and this seems to match reality - is to incentivize certain kinds of transactions.

unfortunately the kinds of transactions it incentivizes are available and profitable mostly for the rich.

>The primary goal of macroeconomic policy for the last decade has been to convince people to move money into shares of more founders [....] This has also been largely unsuccessful, as people simply dont want to give random founders money.

Huh? how about qualified investor rule which denies most people the chance to give money to founders? I.e. the same as above - the transactions available only to the rich.

Its not an egalitarian society and there is a caste system. That has nothing to do with the utility of the tax policy and velocity of money.

Not sure what answer you wanted.