Question

Cory recently sold his qualified small business stock (acquired in 2013) for $90,000 after holding it for ten years. His basis in the stock is $40,000. Assuming his marginal tax rate is 35 percent, how much tax will he owe on the sale?

Answer 1

Cory may qualify for a 100% exclusion of the capital gain from selling his qualified small business stock held for more than ten years, meaning he could potentially owe no tax. However, if the stock does not qualify or exceeds the exclusion limit, he would owe tax based on his marginal rate of 35% on the taxable portion of the gain.

Step-by-step explanation:

The student is asking about the tax implications of selling qualified small business stock (QSBS) that was held for more than ten years. Cory sold his stock for $90,000 and his basis was $40,000, resulting in a capital gain of $50,000. Assuming a marginal tax rate of 35%, we have to take into account specific tax rules associated with QSBS.

However, for QSBS acquired after September 27, 2010, and held for more than five years, there is typically a 100% exclusion for the capital gain (up to $10 million or 10 times the adjusted basis of the stock), under IRC Section 1202.

Therefore, if Cory's stock qualifies for this exclusion and he meets all the applicable requirements, he may not owe any tax on this gain. If the stock does not qualify, or if Cory has gains in excess of the exclusion limit, then he would apply the 35% tax rate to the taxable portion of the gain.