If you thought watching your refund add up on Turbotax was fun, wait until you learn about Qualified Small Business Stock (QSBS). While this regulation—also referred to as Section 1202—has been around since the 1990s, recent updates to its legislation have made it much more attractive to entrepreneurs, investors, as well as some employees. Essentially, QSBS allows shareholders to avoid capital gains tax entirely upon the sale of their shares. This exclusion saves shareholders thousands, in some cases millions, of dollars in taxes.

QSBS can get complicated quickly, so let’s start with some key terms and an example:

• Cost basis: the original value of an asset for tax purposes, usually the purchase price
• Capital gains: the positive difference between the sale price of the asset and its original purchase price (cost basis)

In 2012, Paige founds Startup Inc. The company is valued at $2 million and Paige owns 100% of the shares. She pays $0.10/share so her...