Section 1202 Exclusion Increased for Gain from Empowerment Zone Business Stock

A taxpayer other than a corporation generally can exclude up to 50% of a gain on the sale or trade of qualified small business stock held more than 5 years. This is called the section 1202 exclusion. Beginning in 2005, the exclusion is increased to as much as 60% of your gain if you meet the following additional requirements.

• You sell or trade stock in a corporation that qualifies as an empowerment zone business during substantially all of the time you held the stock.
• You acquired the stock after December 21, 2000.

Condition (1) will still be met if the corporation ceased to qualify after the 5-year period that begins on the date you acquired the stock. However, the gain that qualifies for the 60% exclusion cannot be more than the gain you would have had if you had sold the stock on the date the corporation ceased to qualify.

The part of the gain that is included in income is a 28% rate gain. See Capital Gain Tax Rates and see Section 1202 Exclusion in chapter 4 of Publication 550.

For more information about empowerment zone businesses, see Publication 954, Tax Incentives for Distressed Communities.