I claimed a Virginia subtraction for the long-term capital gain from selling stock in a big, well-known company -- why did the Department deny it?

Plain-English summary

Virginia offers a subtraction from taxable income for long-term capital gains, but only for gains tied to investments in genuinely small, Virginia-based technology or "qualified" businesses -- not investments in any company that happens to do technology-related work, however large. This ruling shows the subtraction failing on its most basic eligibility requirements.

A taxpayer claimed the subtraction on her 2018 Virginia return for a long-term capital gain from selling stock in a particular company. Under audit, the Department denied the subtraction because she hadn't shown the gain was attributable to an investment in a "qualified business." Virginia Code § 58.1-322.02 24 spells out the requirements clearly: the income must be attributable to an investment in a business meeting the definition of "qualified business" under Va. Code § 58.1-339.4 (or another technology business approved by the Secretary of Technology), and that business must (1) have its principal office or facility in Virginia, and (2) have had less than $3 million in annual revenue in the fiscal year before the investment. The investment itself also had to be made between April 1, 2010 and June 30, 2020, and a taxpayer who already claimed a separate investment tax credit for the same business under § 58.1-339.4 can't also claim this subtraction for the same investment.

Here, the company at issue was a global Fortune 500 corporation headquartered in California with billions of dollars in annual revenue. Even setting aside whether it might otherwise have qualified as a "technology business," it flunked two of the threshold requirements outright: its principal office wasn't in Virginia, and its annual revenue was orders of magnitude above the $3 million cap. Because those requirements are basic eligibility gates -- not factors to be weighed against other favorable facts -- the Department upheld the denial.

What this means for you

Anyone considering claiming this subtraction for a stock sale gain

Confirm, before you claim it, that the company you invested in genuinely had its principal office or facility in Virginia AND had less than $3 million in annual revenue in the fiscal year before your investment. Neither requirement is optional or a matter of degree -- a large, well-known, or even technology-focused company that fails either test won't qualify, however legitimate the underlying capital gain itself is.

Investors in small Virginia startups or technology companies

If your investment genuinely meets both the location and revenue-size requirements, and falls within the April 1, 2010 to June 30, 2020 investment window, the subtraction remains available -- just be prepared to document that the business met those specific numeric and geographic thresholds at the time you invested, not merely that it does technology-related work.

Anyone who also claimed the related investment tax credit under Va. Code § 58.1-339.4 for the same business

You can't claim both the credit and this subtraction for the same investment in the same business -- choose one.

Common questions

Q: Does this capital gain subtraction apply to any technology company I invest in?
A: No. The company must have its principal office or facility IN Virginia and less than $3 million in annual revenue in the fiscal year before your investment -- large, established, or out-of-state companies don't qualify regardless of their business focus.

Q: Does it matter that the company I invested in was genuinely doing technology work?
A: Not if it fails the location or revenue-size thresholds. Those are independent, mandatory eligibility requirements -- meeting the "technology business" definition alone isn't enough if the company's principal office isn't in Virginia or its revenue exceeds the $3 million cap.

Q: Is there a time window for when the investment had to be made?
A: Yes -- the investment must have been made between April 1, 2010 and June 30, 2020 to qualify for this subtraction.

Q: Can I claim both an investment tax credit and this capital gain subtraction for the same investment?
A: No -- if you've already claimed a tax credit for an investment in a "qualified business" under Va. Code § 58.1-339.4, you can't also claim this subtraction for an investment in that same business.

Citations and references

• Va. Code § 58.1-322.02 24 (subtraction for long-term capital gain from investment in a qualified technology business, subject to location, revenue, and timing requirements)
• Va. Code § 58.1-339.4 (defines "qualified business" for the related investment tax credit; cross-referenced by the subtraction statute)
• Va. Code § 58.1-301 (Virginia conforms to IRC terminology/references unless a different meaning is clearly required; Virginia income tax starts from federal adjusted gross income)

Subject

Subtractions : Capital Gain from Investment in Qualified Technology Business - Statutory Requirements, Annual Revenue Limitation

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 22-64

Original ruling text

April 5, 2022

Re: § 58.1-1821 Application: Individual Income Tax

Dear *:

This will reply to your letter in which you seek correction of the individual income tax assessment issued to * (the “Taxpayer”) for the taxable year ended December 31, 2018. I apologize for the delay in responding to your appeal.

FACTS

The Taxpayer filed a Virginia resident income tax return for the 2018 taxable year claiming a subtraction for long-term capital gain derived from her investment in * (the “Company”). Under review, the Department denied the subtraction because the Taxpayer had not provided evidence that the gain from the sale of stock was attributable to an investment in a qualified business. The Taxpayer appealed, contending she was eligible to claim the subtraction.

DETERMINATION

Virginia Code § 58.1-301 provides, with certain exceptions, that terminology and references used in Title 58.1 of the Code of Virginia will have the same meaning as provided in the Internal Revenue Code (IRC) unless a different meaning is clearly required. Conformity does not extend to terms, concepts, or principles not specifically provided in the Code of Virginia . For individual income tax purposes, Virginia “conforms” to federal law, in that it starts the computation of Virginia taxable income with federal adjusted gross income (FAGI). Income properly included in the FAGI of a Virginia resident is subject to taxation by Virginia, unless it is specifically exempt as a Virginia modification pursuant to Chapter 3 of Title 58.1 of the Code of Virginia .

Virginia Code § 58.1-322.02 24 provides for a subtraction for any income taxed as a long-term capital gain for federal income tax purposes. The following restrictions apply:

To qualify for a subtraction . . . , such income shall be attributable to an investment in a “qualified business,” as defined in 58.1- 339.4, or in any other technology business approved by the Secretary of Technology, provided that the business has its principal office or facility in the Commonwealth and less than $3 million in annual revenues in the fiscal year prior to the investment. To qualify for a subtraction . . . , the investment shall be made between the dates of April 1, 2010, and June 30, 2020. No taxpayer who has claimed a tax credit for an investment in a “qualified business” under 58.1-339.4 shall be eligible for the subtraction under this subdivision for an investment in the same business.

The Department disallowed the subtraction because the Taxpayer was unable to provide documentation proving that the Company satisfied the statutory requirements. The Company is a global Fortune 500 company based in California with billions of dollars in annual revenue. Even if the Company would otherwise meet the definition of a “qualified business,” the Company did not meet the requirements that its principal office or facility be in Virginia and that it have less than $3 million in annual revenues in the fiscal year prior to the Taxpayer’s investment. Accordingly, the Department properly disallowed the subtraction.

The Taxpayer will receive an updated bill that will include accrued interest to date. The Taxpayer should remit the balance due within 30 days of the bill date to avoid the accrual of additional interest and possible collection actions.

The Code of Virginia sections cited are available on-line at www.tax.virginia.gov in the Laws, Rules & Decisions section of the Department’s web site. If you have any questions regarding this determination, you may contact * in the Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/3875.X