Neil here.

The world of angel investing comes with its fair share of perks… and I’m not just talking about the potential returns you could see by getting in early.

In fact, some of my favorite angel investing perks come straight from our very own government… in the form of tax breaks.

You see, small businesses – including startups – make up the backbone of our economy, and our policies have often tried hard to keep that entrepreneurship alive and well.

Because of that, the government uses various tax programs to reward angel investors for helping to keep these small businesses running.

And with tax season kicking off in just a couple of months, it’s a good idea to learn exactly what benefits and write-offs you could be entitled to as an angel investor.

Today, let’s talk about one of the most important ones.

It’s called the Capital Gains Exemption (IRC § 1202), and it could save you a huge chunk of change come tax time.

Let’s dive into exactly what that means…

What is the Capital Gains Exemption (IRC § 1202)?

Picture this. You’ve just found the perfect startup that checks all of your boxes, and you decide to invest $1,000.

Ten years later, the company is acquired by an even larger competitor, and your stake is now worth $20,000. In other words, you’ve made a profit (or a gain) of $19,000.

Normally, you’d owe the IRS a hefty sum of that gain. Depending on your taxable income and filing status, these types of capital gains are generally taxed at a rate between 15% and 20%.

Based on those numbers, you’d probably owe the IRS anywhere between $2,850 and $3,800.

That’s a lot of money that you could be funneling into your bank account, or even another investment, instead. And this tax applies to any profits you make from the sale of an asset, including shares of stock, real estate, businesses, and more.

Luckily, the government provides angel investors in this situation with a major perk.

It’s called Section 1202, and it removes that tax burden from angel investments.

Now, this only applies to qualified C corporations, or C-corps. The profits from these types of organizations are taxed separately from their owners by the IRS (rather than going straight to the shareholders).

But here’s the thing. Most startups seeking investors ARE C-corps.

Your angel investor portfolio will likely include several of them… and if you hang onto your shares for more than five years without a profit, you’ll be exempt from 100% of capital gains taxes on those returns (up to $10 million).

That’s a pretty sweet deal, and it proves exactly why angel returns are so much more attractive than anything you could snag on the stock market.

For even more information on how to hack your taxes as an angel investor, you can check out my full report here. It dives straight into the nitty gritty of each tax perk you could be entitled too, simply for investing in startup companies.

(Remember to talk to a registered financial advisor if you have any questions about your taxes in particular.)

Do you have any other questions about angel investing? Comment below with what you want us to cover next time!

Have a nice weekend, and I’ll be back soon with another update.

Until next time,

Neil Patel