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J.K. Lasser's Your Income Tax 2013: For Preparing Your 2012 Tax Return by J.K. Lasser Institute

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5.7 Deferring or Excluding Gain on Small Business Stock Investment

To encourage investments in certain “small” businesses, the tax law provides special tax benefits.

Rollover of gain from sale of qualified small business stock (QSB stock).

Gain on the sale of qualifying small business stock (QSB stock) held for more than six months may be rolled over tax free to other QSB stock. The rollover must be made within 60 days of the sale. To qualify as QSB stock, the stock must be stock in a C corporation (not S corporation) that was originally issued after August 10, 1993. The gross assets of the corporation must have been no more than $50 million at all times after August 9, 1993, and before issuance of the stock, as well as immediately after issuance of the stock. An active business requirement must also be met. You must have acquired the stock at its original issue, as a gift or inheritance from a qualifying transferor, or in a conversion of other qualified stock. See the Schedule D instructions and IRS Publication 550 for further QSB requirements.

If the sale proceeds exceed the cost of the replacement stock, your gain is taxed to the extent of the difference. The basis of the replacement stock is reduced by the deferred gain.

To elect deferral, report the sale on Part I (short-term gain) or Part II (long-term gain) of Form 8949. Enter code “R” in column (b) and enter the deferred gain as a negative adjustment in column (g).

Generally, the election to defer gain must be made by the ...

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