A few years ago, the independent newsroom ProPublica published a shocker of a report.
Based on an analysis of 25 years of tax returns, here’s what it uncovered:
- 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 world’s richest citizens. Their wealth has grown by literally hundreds of billions of dollars in a single year. But still, they paid zero income tax. None. Zilch.
This might make you angry. But it might make you curious, too…
I mean, how did they pull this off? And if what they’re doing is perfectly legal, shouldn’t you be doing the same thing yourself?
Today I’ll show you how.
“Secret” Stock
As it turns out, there’s a little-known “secret” that many of the world’s wealthiest citizens use to pay far less, or even nothing, in taxes.
It’s called Qualified Small Business Stock, or QSBS for short.
Most people haven’t heard of QSBS, including most professional investors. That’s because, to qualify, a company needs to be worth less than $75 million at the time of your investment.
Most public companies are worth far more than $75 million. So QSBS doesn’t help investors in the stock market. But if you invest in private startups, QSBS can give you a huge tax advantage.
Let me explain…
Big, Beautiful Tax Savings
On July 4th, President Trump signed his domestic spending and tax package into law.
He called it the “Big Beautiful Bill,” and several of its provisions impact startup investors. In particular, the bill improves the QSBS tax exemption, or as it’s formally known, IRS Section 1202.
Let’s look at an example, using some simple math. Let’s say you invested in a startup five years ago. You invested $10,000 to buy a 10% stake.
Fast forward to today and the startup gets acquired for a little more than $1 million. Once you back out your original investment, you have a profit of $100,000.
The new law provides you with a way to avoid paying taxes on your QSBS gains entirely — as long as certain conditions are met:
- Since you held the QSBS for five years, 100% of the gains are excluded from taxes. What an incredible win. Meanwhile, if you’d held for four years, there would be a 75% exclusion, and if you’d held for three years, there would be a 50% exclusion.
- The cap on tax-free gains is $15 million, or 10x profits, whichever is higher. So even if you make $15 million in profits, you’d still pay zero in taxes.
- At the time you invest in the startup, it needs to be valued at $75 million or less. In other words, to qualify for QSBS, invest in startups that are valued at $75 million or less.
But what if your startup investment doesn’t qualify as QSBS? For example, what if it’s valued at $100 million when you invest, or what if you sell your stake after just one year? 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.
To see if your IRA allows you to invest in startups, email them or give them a call. Explain that you’re trying to invest in a private startup through your IRA and see if they allow it.
If they allow it, great. And if they don’t allow it, take a look at providers like Entrust or Sterling Trust.
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!
Happy investing.
Best Regards,
Founder
Crowdability.com
