Bryan Hasling: [00:00:00] It's like 50:50, you know, I'll talk to somebody and they're like, oh yeah, sweet QSBS, and then I'll talk to the other half of people and they say, what is that?

Probability say like maybe it's not gonna happen that often, but when it does, you as an angel investor, need to be aware of how you can potentially mitigate, or in many cases, erase capital gains tax.

They wanna incentivize early investors, venture and angels to invest in startups.

Traditional VCs are hyper aware of QSBS because they totally qualify as well.

The reality is that most angels should be paying attention to 1244 losses. The punchline with all of it is if you are going through an any exit at all, or you are about to, you see the writing on the wall, it's time to get your ducks in a row.

Andrew Kazlow: Welcome to the [00:01:00] Diligent Observer, where we help angel investors see what most miss. I'm your host, Andrew, and every week we explore what works, what doesn't, and why through conversations with experienced startup investors and operators.

My guest today is Bryan Hasling, a Partner at Modern Financial Planning, active angel investor, and a wealth management specialist for families working in tech and startups. In this episode, Bryan breaks down how angel investors can legally pay zero capital gains tax on their biggest winners up to $15 million dollars, shares why the timing of an investment matters a lot, and walks through how to turn a losing investment into a serious tax benefit.

Now, we get into a lot of nuance today, so as always, just a reminder that this is not investment or tax advice and is being shared for educational and informational purposes only. I hope you enjoy learning from Bryan as much as I did. 

Bryan, thank you for being with me today.

Bryan Hasling: I am happy to be here [00:02:00] Andrew.

Andrew Kazlow: Okay, so Bryan, normally I ask the guest what they're excited about, but today I am gonna start with what I'm excited about, and that is the fact that we're gonna talk about tax wisdom and best practices for angel investing. I spent a lot of money on an MBA, and one of the key takeaways was that one of the easiest places to go find untapped value is in tax strategy. And so I'm super excited today to talk about what is a really boring, kind of forgotten topic in the world of startup land, where we're all excited about the actual tech in the future and the innovation that's happening. And we often forget that the actual mechanics of what we're doing here matter a whole lot.

So, uh, really excited to hear more from you on, you know, how you're seeing that done. Well, uh, in and through your, your practice. So Bryan, welcome. Glad you're here.

Bryan Hasling: Um, yeah, I'm glad to be here. You're the first person to say that, uh, to me in a while. [00:03:00] I'm excited about this. Yeah. Taxes. Um, tax is one of those, like necessary evils. It's like we, you know, we want to pay our fair share, but we don't wanna leave a tip kind of thing. So, you know, it often times it definitely pays dividends to kind of know at least like some of the big wins you can get.

You know, there are so many, there's a million small little like. You know, death by a thousand cuts when it comes to like tax strategy or tax savings, like maybe. But today I want to cover some of the big ones and specifically how they might help angel investors. Um, because angel investors are subject or they do have more tools available to them on the tax side, uh, when it comes to making investments, whether they do well, which we hope for. Um, but also sometimes when they don't do well, there's also some things to be, uh, aware of

there 

There's 

lots of like nooks and crannies. It, you know, caveat, caveat, you know, there's a lot [00:04:00] of rules and check boxes to hit. I can't cover 'em all, but at least introduce them to you and everyone.

Andrew Kazlow: Fantastic. Well, I look forward to jumping into all those. Maybe we can start with what you see as some of the most common or most surprising things that you would think. Like you're a tax guy, so you understand a lot of this stuff, but what are some of the things that you have found surprising that most angels don't think about or don't know about that are available to them.

Bryan Hasling: Yeah, I mean the big, the big thing is realizing that. Um, not, there's, there's a lot of tax things out there. You can be a founder. If you're a founder, you have certain things that are available to you 'cause you're running a business, but you're also like a major shareholder. You have a lot of things. If you're running a venture fund, you've got like a different hat on typically.

But if you're an angel investor and you've made an investment, um, in something, we hope, we hope for the [00:05:00] best. We know the odds. Um, we know the odds and the probabilities and the statistics of like how many are the big winners and how many are not. So when we talk about some of the advantages for some of the big winners, we have to know like, you know, prob probability say like maybe it's not gonna happen that often, but when it does, you as an angel investor, certainly, um. You certainly need to be aware of how you can potentially mitigate, or in many cases, erase capital gains tax. That's the big one that we're solving for, or we want to introduce to the audience. On the flip side of it, maybe more common, uh, unless you're a superb investor, like I'm sure your audiences are, uh, they're

Andrew Kazlow: Only the best. Listen to this show.

Bryan Hasling: It must be just my friends who, uh, you know, but when things don't go as well, or maybe a company doesn't make it shuts [00:06:00] down, oftentimes there are ways to kind of like, you know, take the edge off on the tax side when it comes to write offs and, um, you know, sweeter deductions than you might be aware of. So I want to introduce both of those at the very least today.

Andrew Kazlow: Well, let's, let's start there. Let's talk about the winners first, 'cause that's more fun. Um, but then I would agree that, that, that capitalizing on the losers is more common. Uh, so let's start with the winners. What's the miss that you, you feel 

Bryan Hasling: So from here on out, everyone's winners, 10 outta 10. Uh, whenever you make any investment, let's just say you have a normal like investing account. You have a Robinhood account, the Schwab account, if I make a purchase for anything at a hundred dollars and I ended up selling it for a thousand dollars.

The difference in there, that gain part when I sell, is a capital gain. Capital gains rates, they kind of depend on what you've got going on. For our audience, the majority of what [00:07:00] we're, what you'll see is, you know, tax rates are like. Either 15% most commonly, or if it's a higher income year for you, it's gonna be 20% of the gain.

Whatever you put in is already yours, but the gain part, you're looking at maybe 20% in capital gains tax. There's another tax to be aware of. Another bummer, uh, there's this thing called net investment income tax, sometimes lovingly called a Medicare surtax, and that's another 3.8% generally. So just in your mind, 23.8% of long-term capital gains. You know, that's, that's what your tax rate is. If, if you, as an angel investor, uh, invest early and you check, check, check, qualify, qualify, qualify, and you hold for the amount of time, I'll talk about all these like requirements in a second. But if you invest early enough when the company's small, a qualified small [00:08:00] business, and you held for a certain amount of time, held long enough, and then you sold later, or like there was an acquisition, you got cashed out, something like that. If you meet, if you meet the qualifications, that gain, uh, basically gets like erased or forgiven or whatever the language ex excluded. If you wanna use the right terminology up to certain limits. And so now you might not have to pay that 23.8% tax on the gain. So that's called qualified business, Qualified Small Business Stock, QSBS. There's been a lot of talk about this. Uh, more recently, last year it was a big topic because it, it made, uh, it made the OBBBA, um, One, Big, Beautiful Bill Act and there were some adjustments to it. Um, actually like the rules got even sweeter and, and better for early [00:09:00] investors. So that's the big one that everyone needs to know about by far.

Andrew Kazlow: And in your experience, 'cause you're an active angel, you, you come from Silicon Valley, you know you're a part of angel group. Do you feel like many investors just aren't aware of this? Like, I've been following this, I'm tracking this, you know, we did a special episode when the, the Big Beautiful Bill published, kind of walking through some of those changes, and I'll include a link to that in the show notes.

So do you and me, this is pretty common. Do you feel like most angels are, are missing this, not seeing, not knowing about QSBS.

Bryan Hasling: It's a house divided I, I'm. I never know. It's like 50:50, you know, I'll talk to somebody and they're like, oh yeah, sweet QSBS, and they'll just use it in lang. Like they'll use the acronym like in a conversation, and then I'll talk to the other half of people and they say, what is that? Maybe I've heard of it.

Oftentimes they haven't heard of it. Um, a lot of times maybe you've heard of it, but you have no idea if that's for you or not. And that's the downside of like the tax code being [00:10:00] as vast as it is. The OBBBA alone. Yeah. QSBS got some, like it got some mic time or it got some spotlight, but there was also like 50 other things that got were, were like on the table, right.

So it's just hard to know like what to focus on. Um, so I guess I'm just here to be the evangelist today. Like angel investors are certainly, like, they have a chance of qualifying for as a QSBS investor. Assuming you meet some of the the main parameters, which I think

we should talk. 

Andrew Kazlow: Yeah, I definitely wanna hear about this, but I mean, this is just to make sure it's clear. This is a huge deal because a lot of the, a lot of the time, this is the winners, right? These are the things that drive the entire return of the angel investment or the venture strategy, right? Is asymmetric outcomes with a few companies in the overall portfolio driving the vast majority of returns.

And so to give up 20 or more percent points on that gain to Uncle Sam [00:11:00] versus potentially keeping that in the pocket on a 10 or 20 or 50 or a 100x-er. We're talking real value. Even if this doesn't materialize on every deal, having it in place where it's possible to have in place is just massive implications for somebody's portfolio.

So, so tell us a little bit more about some of the exclusions and then how to, like practically, you know, how do I do this? How do I make sure that all of my qualified investments are getting this, uh, treatment?

Bryan Hasling: Yeah. So let's make sure that you know what it is you're actually aiming for. See if it's worth your time. Punchline it is. Uh, and then, and then it's like once you know what you're aiming for and all your inve, all your audience members. You know, 10 outta 10, they're gonna be winners. What do I do now?

Right? So we'll talk about both of those things. So what's the carrot that we're aiming for? QSBS, again, you're trying to get your capital gains taxes excluded. And up to certain limitations, right? So it's [00:12:00] really just an incentive from the government. And this is all IRS federal stuff. We're talking about this.

I'm not introducing state stuff because some states follow this, some states don't. Let's keep it simple. We're just talking about the IRS Federal Tax Code. They wanna incentivize early investors, venture and angels to invest in startups. And so that's when like startups, small businesses, qualified small businesses. If you get in with a qualified small business as an investor and you have held your shares for, I'm gonna use the new rules from the OBBBA, just for simplicity. If you've held anywhere from three to five years, at least you'll get some sort of exclusion. If you hold for all five, you get the full exclusion. How much can you potentially exclude? Um, the numbers, the number's really big. It's up to $15 million of your capital [00:13:00] gains just kind of removed, right? So that's a big number, right? These are like venture fund, level like numbers, but you know, so that's maybe like a, an a 1000x sort of like return for typical angel checks.

Andrew Kazlow: So for a typical, you know, 25K angel check, it's never gonna even a 1000x. Right. That's pretty good. Um, you're gonna keep a lot of those dollars potentially, if you're able to maximize these exclusions, is what you're saying.

Bryan Hasling: That's right.

That's right. Yeah. So like, let's say the average check size is $10,000, you know, and you, you hit a 10x, like a a 10 bagger and you sold for a 100K, that $90,000 now does not, um. You know, you're not gonna get taxed on that $90,000, which definitely affects your after-tax returns.

Andrew Kazlow: Yeah, no kidding. Okay, so keep going. What are the other like exclusions or conditions I need to be thinking about?

Bryan Hasling: So the big thing, the easiest way to think about it [00:14:00] is that to qualify the, the company itself or the startup has to qualify as a qualified small business. That's the very first thing if, if the company's too big or if it falls outta some of the lines drawn by the IRS, then like, don't even waste your time with the other stuff, right?

So you have to hit, you have to hit the company first, and then once that one's a small business, uh, qualified small business, then the investors themselves have a few checkpoints themselves. So the company itself, um, it's actually not that hard of a threshold to hit. I think most startups, at least the startups that we're seeing in our angel groups, a lot of times they, yeah, I mean, they qualify. They qualify pretty, pretty quickly. So, I'll go over like the five main, like checkpoints pretty quickly. So the, the company itself, the startup itself a, needs to be a C-Corp [00:15:00] That's pretty typical for most startups that are like raising outside capital. Um, but like it's just one of the checkpoints. The big thing is like, how small are we talking about?

Well, at the time of your investments for right before the company needs to be, have gross assets of uh, less than $75 million. So $75 million or less. It's a qualified small business. And so your goal as an investor is to dis, is to maybe look at that. It's easier to just to look at when it comes to like software tech or like SaaS businesses.

Like it's really just cash in the bank, few computers here and there. Like it's, it's a lot easier if it's like a manufacturing sort of deal. And they have a lot of assets, right? Like it's like a little bit murkier there. Like it's like the hardware and cash in the bank, right? But a lot of the startups you see at the early stage, definitely like series A or before like. It's a pretty easy threshold to [00:16:00] cover, and you're trying to get your, your invested dollars in before the company crosses that line. That's important. Once the company or itself raises a ton of money and they've got a bunch of money now and they've crossed that threshold of $75 million, it's no longer a qualified small business, meaning the stock can't be qualified itself. And once you go that way, you can't go back. The, the water is spoiled, so to speak. So $75 million is the company size. That's the big one. Also, what's important, the shares that you buy or you know, the shares that you buy, the equity that you hold needs to come directly from the company. They have to be directly purchase shares, basically.

So originally issued, that's important because in the private sort of equity world. There's a lot of secondary markets out there. You can buy, you know, you can buy into startups in the secondhand market, basically there's a lot of these marketplaces out there. [00:17:00] Those don't count. It's gotta be like originally issued stock. It's another threshold that's interesting. 80% of the assets in the business need to be directly like aimed at the active business that you're in. Um, that one's more important because there are actually businesses that are specifically excluded from being allowed to like become a a qualified small business.

So like consulting businesses can't be QSBS, finance, accounting, legal restaurants, farming. There's a whole actually list on the IRS website. Those are just like the common ones that I see. So like. You can start off as, as a qualified small business, like stand in your lane. I'm doing SaaS, or whatever I'm doing, but as soon as you, but like if a majority of your business or assets starts to like be, you know, shifted over here into another realm, or maybe you decided [00:18:00] to put a bunch of your capital in real estate as a holding period, like you can really negate the company itself, can negate all of it very, very quickly.

Andrew Kazlow: So like I could start a business, you know, if this is a SaaS product, we're gonna scale this and sell it to enterprise businesses. That doesn't work out super great for me. It's after three years, I'm like, ah, let's just put it into a real estate business. And then,

you know, I've totally pivoted the business you're saying.

Now I wouldn't qualify for those exclusions.

Bryan Hasling: And it can ruin, like all of it, it can spoil all the milk, so to speak. So those are important. So, so that's, those are the biggies when it comes to the, the company itself. Being a qualified small business, a QSB, so to speak. But then there's like, alright, but what about the stock and investors in the stock? That's, that's the next most important thing. And angels have a couple of, hmm, not landmines to be aware of, but there's just a couple nuances that are specific [00:19:00] to angel investors. I'll explain why. So again, the shares that, that an angel investor must have, they need to come directly from the company. So again, no secondary markets.

It's gotta be direct, direct ownership. Um, this is interesting because in my, my own angel group, we have what we, what we lovingly call a a sidecar fund. And the big question is like, well, if I'm an investor of the sidecar fund and then the sidecar fund itself invests in the startup. If it is a big winner, will those tax benefits flow down to me so that I can take advantage of QSBS?

Andrew Kazlow: Great question.

Bryan Hasling: It's a big question. It's like the question, um, the answer is yes, but it depends. I'll just, I should just said it depends. Um, it depends how the sidecar fund or the, it's usually like an [00:20:00] SPV type of thing. Depends how that thing, it depends on that entity shape and how it files taxes basically. Most of the time these like funds, there's like SPVs are set up as like pure pass through LLCs.

Like, it's like, yeah, it does a tax return, but the reality is it just like immediately, just like spits everything out to the actual like members or the investors underneath. So like if it's a pure pass through entity, it's really just a conduit to do the pure investing as if it isn't there at all. It just helps to divvy up the percentages. If it's a pure pass through, most of the time it's going to, you're still gonna qualify for qualified small business. So your, your ownership counts in those cases. As soon as it starts to become like, you know, the fund like holds, uh, it retains some of the earnings and starts to do like [00:21:00] funky stuff with management.

Like now you're getting dangerously close to sort of piercing that veil. But that's a major question that we had to look up in my own angel group.

Andrew Kazlow: Which would imply, so the fund itself. So let's say there is management fees, it's more of a traditional VC. Like let's say I invest in a VC, right? There is a management team. They're taking a 2 and 20, you know, and the fund is invested in a company that, like I'm invested in a fund that then invests in a business.

How does QSB work QSBS work in that instance? Does the VC entity receive that? And then I receive benefits in indirectly, uh, in my distributions as an LP, though those would obviously have that 2 and 20,

you know, taken off the top. Is that functionally how that would work? 

Bryan Hasling: Yeah. Management fees don't like negate it by any means. It just, um, so traditional VCs are hyper aware of QSBS because they totally qualify as well. They're gonna be setting up, they're gonna be setting up their funds like [00:22:00] 9.9 outta 10 times to be able to like qualify for QSBS for everyone just 'cause they know like this is such a big deal.

There's a couple things I'll have to like refresh my memory that like definitely like make it not okay. Like if the VC fund actually raises from like, like if they're LPs are like international LPs, right? We're talking, we're talking like institutional grade, like VC shops. Uh, that's one of the things that like, you know, spits it out. Um. But for, for angel investors raising via SPV, by and large, like everyone's setting things up as a pass through LLC, you're a passive investor. Most of the time it qualifies.

So that's a big one there. The biggest landmine that I think in that angels are not aware of is being very, very. We need to remember that the exact instrument that you use to invest. Uh, it's remind [00:23:00] ourselves that it's not always stock, like we're making an investment, but we don't actually own stock yet. Or in some cases, stock actually isn't like created. We just have a promise for future equity. Very, very important. A lot of pre-seed, even series A in many cases.

A lot of startups are raising via safes these days. So the big thing is like, well, does a, does a safe count? Does a safe, does a safe count as direct ownership in the company? And the reality is for QSBS purposes where I'm trying to hold my shares for three to five years, at the very least to get something, just remember that a safe isn't actually equity yet. You know, the FE and the S-S-A-F-E, the FE is kind of a giveaway, like it's future equity. You don't have equity yet, right? So it's same with some of the folks I work with in Silicon Valley who have like stock options. [00:24:00] It's not stock yet. You don't get to start your clock. You know, those folks get a chance at QSBS as well. Um, but it's not stock until you've actually like it's been converted to stock with options. It's whenever you like buy them or exercise them. With a safe, you're kind of at the mercy of whenever, like a price round happens and then poof. You should have some equity

Andrew Kazlow: Yep.

And, and it must qualify at that time, so Right. All the 

Bryan Hasling: at that time. 

Andrew Kazlow: you mentioned, it's gotta be under the 75. They've gotta be doing the right stuff, you know, not in one of these excluded categories.

Bryan Hasling: That's exactly right. So it's at the time it converts. At the time your, your day one of holding equity is not always day one of when you gave them money. And that's a huge thing. Your clock does not start. But also the company could have gotten super big really fast, which we're seeing in the AI world right now, like valuations are just getting like [00:25:00] ridiculous and they're blowing past these QSBS levels really, really fast. Um, yeah, we're seeing some of that mainly, you know, Bay Area AI companies. Um, but yes, you're right. It's at that time. Whenever the price round happens, or just whatever your, whatever you had, your mechanism gets converted to stock. That's day one. And at that day one you have to look around. It's like, do I do, I meet all the, the criteria. So safe are the big one and just the other one is convertible notes. Also not equity. So just have to, we just have to remember that when we're deciding on. Should we do this deal or not? You know, they'll say what they're offering. Is it safes, convertible notes? Is it direct equity? Preferred stock? Um, safes and convertible notes. They're not equity yet. Preferred stock, stock. You know, those things. Those things actually [00:26:00] count.

Andrew Kazlow: Hmm. So Bryan, maybe you'll get to this, but a big question that's blasting in my brain right now is like, practically, okay, let's say I'm fairly confident that this deal qualifies and I wanna make sure it gets the exclusion applied and all of that. How do I document this properly? Like I've got a CPA that I work with.

Let's say I've got, you know, a legal counsel that I trust, you know, I've got a team around me, but like, what do I need to do to document all this, to make sure that my ducks are in a row from a compliance standpoint, so that in whatever, five years from now when this thing does exit and I'm about to have an awesome year,

uh, I'm able to properly.

You know, apply those exclusions when I file for that year.

Bryan Hasling: Yeah. This, this also came up in my own group because we realized that it becomes very, very apparent. That, how am I supposed to prove that the company itself, which is the very first hurdle, was small enough at the time of my entry [00:27:00] point? That's been the hardest thing because the companies themselves, like they're the ones who have, they have the books

Andrew Kazlow: Right, and it's five years ago, so nobody remembers anything from five years ago.

Bryan Hasling: They could have changed softwares.

You know, like who, who knows?

Andrew Kazlow: And this is at the company's messiest too, right? Not only is it long time ago, but it's also when it was, you know, Joe at his desk with the, you know, team working out of the house. Like it was very and disorganized. 

Bryan Hasling: Is a huge, this is actually a huge problem, I think, and uh, I wanna do more about this to promote this. I wanna start with my own group, but we started talking about whenever we are ready to make an investment, what's our QSBS protocol? And really the biggest thing is going to be if the fund has enough people saying yes, or just people are doing individual checks to whatever. Because we do have a protocol in some respect. We have like background checks that we do. Like there's, there's stuff that happens. We should also be asking like, can you just share a [00:28:00] simple balance sheet? How much money do you guys have in the bank? And like timestamp it, and then that's gonna go in the archives and it's dated. A balance sheet is the most that most people are gonna get. Like as far as like rinky-dink startups, excuse my language, Silicon Valley has definitely like taken a hold of QSBS. They know how, how much appetite there is for this sort of thing. So like, uh, a lot of the folks I work with, we haven't even described it like I do wealth management and tax strategy for folks in and around Silicon Valley, usually early employees, but like now it's late stage and now there's like equity to deal with and it's a tax mess. Or it can be if they touch anything. A lot of these folks have, um, you know, accounts at Carta. Cartas definitely the big player. And just, you know, instead of a Schwab account, I have a Carta account.

It's got like all my details of all my equity in there. And what you'll see [00:29:00] is Carta is starting to help people come up with like a QSBS, like letter of a attestation, where the CFO or some HR person knows that everyone's gonna be asking. And so like at the purchase they'll, they'll just have like a pre-written letter that says like, as far as we know, like this qualifies and here's my signature.

And like you can download it. So for a lot of the folks I work with that have stuff in Carta, it's actually like there and we just like download it and like now it's in my files. That is on the hyper, hyper organized side of things, right? Like these are, these are companies that are like heavily funded.

They know that that's like checkpoints that they're, you know, early LPs are looking for, right? That's the whole game that they're playing. We need to start doing that stuff at the lower level. Um, definitely with local angel groups, like what's our, you know, poor man's version of a, of a letter of a attestation [00:30:00] or anything, right. I don't know if we're gonna be able to get every like startup to have like a formally written like, you know, typeface and everything, but if we can get our hands on the balance sheet, that's a big, big, that's a. That's honestly most of the battle. You just wanna prove that the company was set up as a C-Corp.

So articles of incorporation, not hard to get. Pretty much every investor is gonna be able to get those. But then also like, you know, balance sheet, which is basically money in the bank that says, Hey, we don't have $75 million,

um, at this point in time. And that's a really, really good start and we need to evangelize that for everyone.

Andrew Kazlow: Which is, I mean, everything you're describing is fairly common diligence material in most angel groups, the individuals who are investing are often relying on the group to do that analysis. And so this speaks to, I think one of the biggest values that a group brings to the table is you at least a light level of sort of, [00:31:00] uh, it's not institutional grade, right?

Because these angel communities are often volunteer or educational, you know, in nature. But there is some structure to them. Whereby some sort of centralized group is building a protocol around this that's then available to individuals to kind of help collaborate with. So,

uh, I love that and I totally agree.

Let's evangelize it together. So 

that's why 

you're here. 

Bryan Hasling: We're gonna make it. Yeah, I'm, yeah. I'm gonna make it. So, um, the next thing is how does this actually happen on a tax return? That's like, ' cause it's like, the reality is how does QSBS happen? Where does all this tax savings like magically come from? Or like go, it all gets, it's just like anything else. It just gets reported on the tax return. So in the year that you sell or you get cashed out, happy things happen right. In the year that the happy things happened, you're gonna have to like do your taxes and just like if you like bought and sold in your Schwab account or your Robinhood [00:32:00] account or whatever you're trading in, um, you're gonna do the same thing with your, you know, startup investments.

You're gonna say, I bought it for this and I sold it for this. You're still gonna have to like list that out. But when it comes to QSBS, there's more to the form. Where you're kind of listing everything out and there's like an, there's another one that's like, there's another line or column that's like for adjustments. And the adjustments is where you're gonna like write it and there's gonna be a little like section, or it's like a code box. And the code box letter. It's Q it. So it was like a Q Box, So that's, that's like the biggie. You know, there's a, like another like worksheet where you kind of like fill out more information. The reality is like, this is a dangerous, I'm not, this is not tax advice. You know, all those caveats, things like that. But I mean, anybody, you can just write that out basically.

Right? But then it becomes, and you can go for it, knock yourself out. Um, but then the, you know, it's on you to have the supporting [00:33:00] data because the reality is QSBS. Uh, is one of like the low hanging fruit for the IRS, like when they see it, a little flag is gonna go

off because you're literally trying to say that you're gonna pay zero taxes.

Andrew Kazlow: On the winners, right? Not on, you know, nothing outcomes on like the big outcomes where there's massive value creation.

Bryan Hasling: So now you've officially just put a target on your back and your odds of getting a letter are high. Uh, especially if you're high income already,

they were wanting to come after you anyways, so now they have a good opportunity to do so, and you have to come up with all the supporting document that proves that you hit all these checkpoints and it's on you. And a thing that I am, uh, I'll say disappointed with time and time again, is many CPAs and tech professionals have very little experience with this. Oftentimes they have, they don't know what I'm talking about. When I bring it up, it's because, I [00:34:00] mean, it's, you know, there's big money that we're talking about.

Venture knows about this. It's going after it, but like the majority of the world, you know, 95% of the world is not, you know, investing outside capital in small C-Corps. You know, it's like, it's just not happening right. 

Andrew Kazlow: We're just taking the standard exclusion and maybe some charitable every 

Bryan Hasling: and that's it. There's a lot of business sales that happen, right? Like I sold a business, but then those are like, you know, those are successful small businesses, but those are normally like, you know, those are LLCs or S corps. They're just like normal mom-and-pop, like successful things. Most aren't C-Corps, like C-Corps are like actually kind of a, an inefficient. Um, entity vehicle, you do it for a few reasons, but the big reason that it needs to be a C-Corp is that you can have different classes of shareholders maybe to delineate like, all right, [00:35:00] who's, you get what I'm saying? But, uh, it's just not as common. So a lot of tax preparers don't even know about QSBS, and, uh, you gotta be, you have to be careful, um, who's filing your taxes. Um, if you're trying to claim it.

Andrew Kazlow: Good question to ask. If you're listening to this, ask your CPA if they know about QSPS and if they don't send 'em this episode. It'd be a great start. Um, Bryan, anything else on QSBS wanna make sure we get enough time on the other, uh, side of the outcome.

Bryan Hasling: well,

Andrew Kazlow: Well.

Bryan Hasling: there's more on the fun stuff, so we might as well just stay on the fun stuff. So, um, big thing that happens, uh, big question is like, okay. Okay, you said I need to hold for, hold my actual equity for three to five years. If I held for three years, I get 50% off my gains excluded. If I hold for four years, I get 75% of my gains excluded. If I hold for at least five [00:36:00] years, I get to exclude a 100% of my capital gain exclusions. What if, uh, I have an acquisition? My, my little startup did really well and they're getting acquired. And there's a liquidate, a liquidity event, but I've only held two and a half years. What happens? That's frustrating. It's frustrating. All this money that I have now, it's so frustrating. Um, I don't wanna pay tax. Are there any, are there any tools or tricks available to me, and the IRS has one for you? Uh, it's called a 10/45 rollover. For our friends who are familiar with real estate, there's a, there's a thing called a 10/31 exchange where you can like sell your building or your rental property and you can, you know, instead of paying taxes on the sale proceeds at that time, you can roll the whole proceeds into the next deal and your cost basis follows you. And [00:37:00] so does your, like, date of purchase of the original one continues on and you can just keep like, you know, expanding the balloon over there. You can do something similar with startup equity. Um, that's what a 10/45 rollover is. You can take your equity that you cashed out, um, you'll need to roll over, find new startups, either one, uh, or I think a fund would count, but don't. Don't count. Uh, I think it would count, but don't quote me on that. I'm pretty sure folks have done that before, though. I think there's a certain amount of time they used to go by. It's not like a crazy amount of time that you'll need to have identified the new startup and then invested the proceeds. So like there's a little bit of a stressful time crunch there. Um, but if you do, you can invest in the new stuff and it's like a, it's a rollover and your, your date, you can continue on. [00:38:00] So I can keep that 2.5 years I've accumulated and let it sit for longer. You can cash some out and then roll over some, like you can get kind of creative, creative with it. But a 10 45 rollover is, it's a big, big deal if you're trying to preserve.

Andrew Kazlow: So this means if I, in that situation, company one exits 2.5 years within whatever the period is, let's guess six months, I deploy those, some portion of those dollars into company two, my 2.5 year clock. Continues uninterrupted essentially. So then if company two exits in two and a half years, I would get to treat it as if I had been in that business for five.

Bryan Hasling: That's correct. Yep. Also very important.

Um, another good planning strategy is around gifting. So if I decide to gift my, share, my startup equity to, let's [00:39:00] say my child or my children, the basis carries over and so does the time accumulation. And this is where a very, very advanced, which I don't see too, too much.

I only work with like regular rich people, not like, you know, Rockefeller rich. Um, but there's a strategy that's out there called trust stacking or QSBS trust stacking where I'm gonna create a little entity for each of my kids or each of my family members that I want to give shares to because I'm like, well, I don't need this money, but I think it's gonna be big. You can start to gift shares into each a bunch of little trust that you've made for a bunch of different people and every, for each individual, they get their own QSBS limits.

Andrew Kazlow: Hmm, interesting. So the, the 15 million for example, doesn't [00:40:00] just doesn't get chopped up. Each slice gets its own 15 million as a result.

Bryan Hasling: That's right. It's per individual. Yes. Now it only makes sense if you had the foresight to do it early. You know, if you're like, there's a bunch of things that could blow it up, right? Like the IPO is like tomorrow and you did it. Like today. They're like, we know what you're doing. That doesn't count. Uh, also if the valuation's really, really big already and you're trying to make a large, larger gift, there's also standard like gift and estate tax, like limitations that normal people need to be aware of anyways.

Like, you're gonna, you're gonna blow through that and like you might end up owing gift tax. So like, it's, uh, it's a super good thing to know about in, in like very niche cases, but, you know, more food for thought, I guess.

Andrew Kazlow: I love it. Fun to think about. Okay, well I do wanna make sure I get to the other side, which is, um, very [00:41:00] common, right? This, I mean, this is gonna be. Uh, the average portfolio I had had John Harbison on this show, he's at TCA Venture Group, you know, one of the most data driven investor communities. Had amazing data on this show to talk about how in the first five years most of your outcomes are gonna be, you know, shut downs or 1x or around that.

And then it's in the year 5 to 10 plus that, you know, the winners really start to show up. So walk me through, you know, some of the things that you've found many angels aren't thinking about or, or aren't as familiar with on how they can optimize, you know, some of those shutdowns. 'cause there are benefits with a shutdown, with a loss.

Bryan Hasling: Such a bummer topic, uh, such a bummer topic. Um, well, let's assume that none of your investors, uh, none of your audience members are gonna need to know this, but tell them about it. So, let's go back to the, if I have an account of like Charles Schwab or something, like, I [00:42:00] bought, uh, whatever, I bought Bitcoin at this, uh, and now it's worth way less.

Hasn't gone to zero, uh, yet. Um, no. Just kidding. Uh, if you sold it at a loss, it's a capital loss. Everybody is allowed to take those capital losses and use them on your, on your taxes. It actually, it ends up helping you actually. Um, capital losses, if you don't have other things to like offset it with.

The most you can take in any one given year is $3,000 in one given year. So if I lost, like, if I lost, like, we'll keep it easy, we'll keep it nice. If I just lost my $10,000 in, in like one deal or one check, um, I could write off $3,000 in that one year and then the other seven I don't lose forever. You just have to like kind of roll 'em, keep carrying them forward until you burn 'em up. [00:43:00] Basically. That's the normal rules, capital losses, like everybody gets those. For startup investing, there is a special line of tax code. Um. We will just lovingly call them 1244 losses. So 1244. Another code IRS tax code as this is not related, related to state taxes. Um, and this says that if you were an early investor, early investor in a startup, and it hit a few like thresholds are a little bit, little bit different than the QSBS like criteria, but if you hit a few different criteria and then you lost and it went to zero, you can write those losses off as ordinary income losses,

Andrew Kazlow: Mmm.

Bryan Hasling: Which is way juicier than capital gains. I think I was saying capital gains rates even on the [00:44:00] high side, like 20%, 23.8% ordinary income. It can be, you know, up to almost, almost 40%. And what you can write off is much, you can write off more than just like 3000 in a year. These limitations or the, what you're allowed to write off. I'm double checking my numbers to make sure I don't say the wrong one. 'cause we're throwing around a lot of numbers.

But basically $50,000 per person. And if you sh. That's important because if you're, in this case, if you're married, you get a $100,000.

Andrew Kazlow: Hmm.

Bryan Hasling: And so, you know, it's a lot of losses. It's a lot of losses. But you can get up to a hundred thousand dollars off, uh, if you write it off against your ordinary income,

Andrew Kazlow: To my personal family, you know, joint return.

Bryan Hasling: Yeah, just normal income. Just guess your normal income. So that's great. Uh, [00:45:00] the big things are, let's see, I'm reading, I'm trying to get the exact language, but at the time the stock was issued or the, the time that you invested at that time, the corporation itself, and I think this can actually be in a C-Corp or an S corp. I'm telling you the rules are changing. Um, the corporation must have received less than a million dollars in exchange of the stock, meaning they've raised. They have raised less than a million dollars. So if they're doing a mega raise and they're raising, we're raising $4 million this round, like too big. But if they're like a lot of groups and they're only raising like, you know, up to $500k you're, you're still considered small for this. This line of tax code doesn't use like the qualified small business lingo. So you're not gonna, you're not gonna see the word small business, but that's their definition of small, uh. 

Andrew Kazlow: Was under a million dollars raised [00:46:00] centrally.

Bryan Hasling: Raised, correct. Yes. So that one is probably like we spent, this is how it always goes. We spent all the time talking about like the really like sexy, romantic one 'cause the like. It's very juicy and attractive to go after. The reality is that most angels should be paying attention to 1244 losses. The punchline with all of it is if you are going through an any exit at all, or you are about to, you see the writing on the wall, it's time to get your ducks in a row. And make sure you have any documentation for anything because you're gonna have to prove that you wired the money in.

You have to prove what size the company was at the time, which all goes back to QSBS, or I guess in this case, 1244 [00:47:00] Protocol for Angels, which we all desperately need, and you really don't wanna be scrambling around tax time to find information that maybe doesn't exist anymore, you know.

Andrew Kazlow: Well, Bryan, this is fantastic. I mean, two really important tools for every angel to be aware of. Obviously there's a massive amount of nuance on both that we can't cover in, uh, 45-minute conversation, but any other thoughts or final encouragement you would have for you know the angel who's looking to be more thoughtful and strategic about their tax strategy.

Bryan Hasling: Yeah, this is where, this is where it gets tricky because, I believe while on one hand I believe every investor, or even if you're like an early employee at one of these like startups, like everybody should be empowered with, with this information, but it's not an excuse. What it might accidentally [00:48:00] do is it might start making smaller startups more attractive or startups that are, let's say an early stager that is actually offering direct equity and not via safe. And you're thinking, oh yeah, Bryan said that safes don't count anyways, and this gets my QSBS clock started and they're offering, they're offering the the information up front so I have it for my records.

I've actually been seeing quite a few deals where they're doing their pitch and they're even saying in their pitch, this is QSBS eligible. And they're saying that meaning they know what's attractive to the investor. And so you might think that that's like, wow, that's attractive and it is, but you really have to go.

It's like, I have all this information, but do I [00:49:00] actually use it for any of my very disciplined, uh, diligent investing that I need to be doing because I could just keep, I could just throw money around and lose it all when I was trying to get QSBS. So it can be distracting, I guess is, is the point. So it's a tough, it's a tough, tough balance. And so I think our goal now, at least with, with our group and what I hope to be able to share more with just like the entire, you know, country of investors, is how can we make just the upfront protocol really easy and mindless so we're actually not thinking about it, and we can like, move on to the more important things, which is, is, this a good company that's gonna return anything, which is only thing that matters at the end of day.

Andrew Kazlow: Yeah, so your point is this, you know, as a company raising on a safe or a convertible debt instrument or something else isn't [00:50:00] necessarily a bad deal, and we shouldn't just pass because it doesn't qualify for QSBS right now. It might still be a great investment even without QSBS. This is just a feature to know about that the US you know, tax code makes available to angels in some certain situations.

Bryan Hasling: Yeah, icing on the cake. Icing on the cake. Yeah. Where also it's a side point where you live also is important, right? Texas, where we both are now, no state tax. California, where a lot of my practice is. Uh, California itself has state tax and does not, uh, comply with any of the QSBS, like exclusions from the IRS, but New York on the other hand, does. And so you're starting to see actually that affect where startups and startup founders want to live actually. Um, [00:51:00] even like across the water in New Jersey, I think that, you know, it's different rules over there than it is in New York, and so people are influenced by this. Venture funds are aiming for this. There's no reason that every angel investor shouldn't also be completely aware, uh, that it is available for them too 

Andrew Kazlow: Well thank you for your time today, Bryan, that has certainly helped achieve that goal. Um, very, very much appreciate you taking the time to walk us through all of this and I look forward very much to our next conversation.

Bryan Hasling: Yeah, this was fun. This was fun.

Andrew Kazlow: Thanks for listening to this episode of The Diligent Observer. I'm your host, Andrew, and if you're an angel investor looking for essential angel intel in five minutes every week, I think you'd enjoy my newsletter. I send my best stuff, interesting deals, and more straight to your inbox so you never miss a thing.

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