Washing Away Taxes with the New QSBS Rules...

From May 2004 - May 2007, Wachovia Bank processed more than $378 Billion on behalf of Mexican drug cartels…representing almost 14% of Mexico’s 2004-2006 GDP. However, simpler businesses like petrol stations and car washes were part of a potentially bigger scandal - appropriately named “Operation Car Wash.”

Car washes have been old favorites for the money laundering crowd. There are tons of cash-heavy transactions, and there is no way to prove past volume. And, there are lots of bigger expenses - from equipment, maintenance, labor, to even the buildings/property themselves (if owned). However, for the non-money laundering crowd, car washes have also been an equally popular (legal) tax dodge. 

LPs regularly send me pitch decks for individual deals, or funds. Most are venture-related, but the topics can vary widely…including car wash deals. The pitch always seems to be the same - and centered around the copious tax advantages (with target locations in sunbelt or western states). I still don’t understand how/why car washes receive such favorable tax treatment - but the trend is far from fading.

Venture investors have had QSBS benefits for years - and I’ve happily locked in 0% taxes on some past angel exits. However, the 5-year hold time threshold was always a challenge with my thesis - especially since the initial rounds were often on notes or SAFEs. Most venture investors exit companies around years 8-12…I tend to exit by year 4 (my median exit hold time is 3.4 years). So, my fund investors rarely leveraged QSBS benefits.

Now, QSBS has changed - and investors can exclude sizable gains at both the Federal and State (in most states) level for shorter hold exits. 50% of gains can be excluded after 3 years, and 75% can be excluded after 4 years (100% of gains are still excluded for 5+ year hold times). This is a game changer for my thesis, and my future Fund investors. 

Once I start raising my Fund 3 in early 2026, I’ll definitely lean on the QSBS/tax efficiency message. Investors love avoiding taxes - and now they can with shorter hold time exits. Although car washes have likely fallen out of favor with cartels, they’re still in vogue with investors - it’s hard to beat the tax benefits. But, finally, it’s also hard to beat the tax efficiency for venture/angel investments - even theses with fast liquidity and short hold times.