The Silicon Valley Loophole Forbes.com (10/26/00) Vol. 104, No. 42 p.7; Boss, Shira J.
A 1997 provision of the tax code called 1045 will allow
investors to defer paying taxes on capital gains made on the sale
of stock of a startup company by reinvesting the money in another
new small business. The tax break applies to investments in
small businesses that are C corporations and have less than $50
million in assets. Investors must hold the company's stock for
at least six months. Although capital gains are to be tallied
for the original investment, rolling over the gains into another
qualified small business within 60 days keeps the deferral alive.
The amount of a stock's appreciation that would qualify for the
tax break is limited to the value from the time it is acquired
until the time when the company no longer is considered a small
business. Unfortunately, gains of more than $10 million, or 10
times the original investment, will be taxed at regular rates.
Investors can hedge.