Certain tax advantages exist for investing in startup companies. Due to the complexity and extensiveness of the tax code, it is essential to consult a tax advisor to receive guidance on how such an investment would affect an investor’s tax situation.
One of the most important tax implications is the treatment of gains and losses related to the stock of a small business. Section 1244 of the U.S. tax code allows investors to take an ordinary loss on the sale or exchange of an investment if it is part of the first $1 million the company raises.1
Section 1202 of the U.S. tax code considers gains on qualified stocks of small businesses. Only 50% of the gains need to be included as gross income when the stock is sold or exchanged after a five-year holding period. However, there are certain restrictions and provisions, with some of these rules only applicable for certain years. For more information on these rules, consult with a tax professional.2