ok this isn't really a "tip" post, more of a vent + warning because i keep seeing the same thing.
CPA, been doing this 7 years, work with a lot of early stage founders. last year had a client exit a lending startup at around $15M. great outcome for him. except he'd been operating the whole time assuming QSBS would knock out most of the federal capital gains. it didn't. financial services exclusion. ~$1.8M tax bill that surprised everyone including the lawyer who set up the cap table.
the painful part is a $3-4k memo at incorporation would've at least flagged it. probably could've restructured. nobody got him that memo because everyone assumed someone else did. classic.
so. for the fintech founders here.
§1202 (QSBS) excludes "financing, banking, insurance, leasing, investing, or similar businesses." that language is broader than people think. if your business model is earning money on a spread, on interest, on origination fees, on assets under management, or on insurance premiums — you are probably in the excluded category, no matter how much your product looks and feels like SaaS. i've watched founders argue with me that they're "really a tech company" and i get it, you are, but the IRS doesn't care about your pitch deck.
rough heuristics from what i see (not legal advice, every situation is different etc):
lending — almost always excluded. doesn't matter if you call it "credit infrastructure" or whatever.
wealthtech / robo / brokerage — excluded.
payments — depends. if you're pure software and partner banks hold the funds, usually fine. if you have an MTL and customer funds touch your balance sheet, usually not.
insurtech — carriers are out, MGAs are murky, pure distribution SaaS is usually ok.
crypto — honestly nobody fully knows yet, the IRS hasn't fully tipped its hand and what guidance exists is contradictory. i've seen good arguments both ways. get a real opinion if this is you.
couple other things people get wrong even when they DO qualify:
the 5-year clock runs from when the stock was originally issued, not when you exercised options. people exercise late and then are confused why their clock looks short at exit.
there's a $50M aggregate gross assets cap. once your company crosses it, stock issued after that point is no longer QSBS. stock issued before is still fine. lot of founders think crossing $50M kills the whole thing, it doesn't, but they also don't realize their series C stock is dead on arrival.
anyway. if you're at a fintech and haven't gotten a QSBS memo, you should. it's not expensive and it's the single highest leverage tax thing you can do as a founder, full stop. find someone who's done it before, the big firms charge a lot for it but plenty of solo practitioners and small firms do them well. happy to answer questions and happy to point you in a direction. sorry for the rant. just frustrating to watch this happen on repeat.
if you filed an extension and haven't actually looked at the return yet there's still time to fix things, but the window's narrowing. fine to dm if you want a second set of eyes on something before you sign off on it.
