A couple of years ago, ProPublica published a shocking report…
It managed to get its hands on 25 years’ worth of tax returns for some of the wealthiest investors in the world. And what it discovered is almost unbelievable:
- In 2007, Jeff Bezos paid zero income taxes.
- In 2018, Elon Musk paid zero income taxes.
- For three years in a row, billionaire investor George Soros paid zero income taxes.
These are some of the richest people in the world. Their wealth has grown by billions of dollars in a single year. But still, they paid NO income taxes!
This might make you angry. But maybe it also makes you curious…
I mean, don’t you want to know how they pulled this off? And if it’s perfectly legal, don’t you want to do the same thing yourself?
Well, today I’ll show you how!
Here’s a “secret trick” that many of the world’s wealthiest investors use to pay far less — or even nothing — in taxes:
Qualified Small Business Stock, or QSBS for short.
Most people haven’t heard of QSBS, including professional investors.
That’s because, to qualify for this designation, a company needs to be worth less than $50 million at the time of your investment.
Most public companies are worth far more than $50 million. So QSBS doesn’t help investors in the stock market.
But if you invest in early-stage private startup companies — most of which are worth far less than $50 million — QSBS can give you a huge tax advantage.
Let me explain…
Roll Your Gains
If you own QSBS in a startup that gets acquired, the IRS offers you a simple way to defer paying taxes on the gain:
Just invest your profits into another startup that’s worth less than $50 million!
In other words, if you use your profits to buy more Qualified Small Business Stock, you don’t need to pay taxes on your initial gain.
Let’s look at an example:
Let’s say you invested in a startup a few years ago. You put in $10,000 for a 10% stake.
Fast forward to today and the startup gets acquired for $1 million. Once you back out your original investment, that gives you a net profit of $90,000.
Well, if you invest that $90,000 into another startup (or several startups), no taxes are due.
This means you can compound your earnings, tax-free!
Avoid Taxes for Longer-Term Holdings
Even better, the tax code provides you with a way to avoid paying taxes on your QSBS gains almost entirely — as long as certain conditions are met:
Basically, you just need to hold onto the stock for at least 5 years.
So in the example above…
If your $90,000 gain came from stock you’d owned for 5 years, you could potentially avoid paying capital gains taxes on up to 100% of the gain — even if you don’t roll it over!
But what if your startup investment doesn’t qualify as QSBS? Are you stuck paying the full freight on your gains? Let’s take a look…
Investing in Startups through Your IRA
As it turns out, even with non-QSBS startups, the IRS provides a tax advantage:
By using your IRA to invest in these deals, you can defer your gains until later.
To be clear, not all IRA providers like Schwab allow you to hold startup investments in your IRA.
To see if your current IRA allows it, just email them or give them a call. Explain that you’re trying to invest in a private startup company through your IRA and see if they allow it.
Many IRA providers are starting to recognize that their customers want to invest in startups. They realize that investors are excited to make this newly-available asset class a permanent part of their portfolio.
Investing in startups through your IRA allows your gains to accumulate tax deferred until you withdraw the capital. At that point, the gains will be taxed as income — but since you’ll likely be in a lower tax bracket, you’ll likely pay far less in taxes!
Keep in mind: investing in startups can be riskier than investing in the stock market. So you shouldn’t invest your entire IRA into this asset class.
But given their market-beating potential returns, we believe every investor should have at least some exposure to startups…
And if you can get that exposure while avoiding taxes, even better!