In 2004, David Baszucki, fresh off a stint as a radio host in Santa Cruz, Calif., started a tiny video-game company. It was eligible for a tax break that lets investors in small businesses avoid millions of dollars in capital gains taxes if the start-ups hit it big.
Today Mr. Baszucki’s company, Roblox, the maker of one of the world’s most popular video-gaming platforms, is valued at about $60 billion. Mr. Baszucki is worth an estimated $7 billion.
Yet he and his extended family are reaping big benefits from a tax break aimed at small businesses.
Mr. Baszucki and his relatives have been able to multiply the tax break at least 12 times. Among those poised to avoid millions of dollars in capital gains taxes are Mr. Baszucki’s wife, his four children, his mother-in-law and even his first cousin-in-law, according to securities filings and people with knowledge of the matter.
The tax break is known as the Qualified Small Business Stock, or Q.S.B.S., exemption. It allows early investors in companies in many industries to avoid taxes on at least $10 million in profits.
The goal, when it was established in the early 1990s, was to coax people to put money into small companies. But over the next three decades, it would be contorted into the latest tax dodge in Silicon Valley, where new billionaires seem to sprout each week.
Thanks to the ingenuity of the tax-avoidance industry, investors in hot tech companies are exponentially enlarging the tax break. The trick is to give shares in those companies to friends or relatives. Even though these recipients didn’t put their money into the companies, they nonetheless inherit the tax break, and a further $10 million or more in profits becomes tax-free.
The savings for the richest American families — who would otherwise face a 23.8 percent capital gains tax — can quickly swell into the tens of millions.
The maneuver, which is legal, is known as “stacking,” because the tax breaks are piled on top of one another.
“If you walk down University Avenue in Palo Alto, every person involved in tech stacks,” said Christopher Karachale, a tax lawyer at the law firm Hanson Bridgett in San Francisco. He said he had helped dozens of families multiply the tax benefit.
