QSBS (Qualified Small Business Stock)
A tax provision letting eligible startup shareholders exclude a large portion of capital gains from federal tax on a sale.
Under Internal Revenue Code Section 1202, stock in a qualifying small business (a domestic C-corp with gross assets under a statutory threshold at the time of issuance) can be excluded from federal capital gains tax if held for the required period, subject to a per-issuer exclusion cap. For QSBS acquired after July 4, 2025, the One Big Beautiful Bill Act raised the per-issuer exclusion cap to $15M (from $10M) and the aggregate gross assets eligibility threshold to $75M (from $50M), both indexed for inflation starting in 2027, and introduced a tiered holding-period schedule: 50% exclusion after 3 years, 75% after 4 years, and 100% after 5 years. QSBS acquired before that date remains subject to the prior rules — a $10M cap (or 10x basis, if greater), a $50M gross assets threshold, and a full 5-year holding period required for the 100% exclusion.
Qualifying requires the issuing company to be an active C-corp (not an S-corp, LLC, or certain excluded service businesses like law firms, financial services, and consulting) engaged in a qualified trade or business, and the stock must generally be acquired directly from the company (original issuance), not purchased secondhand on a secondary market.
QSBS eligibility is determined at the moment of stock issuance based on the company's gross assets at that time, which is why founders and early employees exercising options or receiving grants early — when the company's balance sheet is small — is far more likely to qualify than equity granted much later after the company has scaled.
QSBS is one of the largest tax benefits available to founders and early employees, and it isn't only a test at issuance: the company's gross assets are measured around issuance, but its C corporation status and the active-business requirement also matter over the holding period.
The per-issuer cap has an alternative: the statute limits excludable gain to the greater of the dollar cap or 10 times the shareholder's aggregate adjusted basis in that company's QSBS sold during the year. That matters most for investors who paid meaningful prices for their shares.
Each tranche of stock gets its own analysis. Founder stock, shares from an early exercise, and later grants can have different issuance dates, gross-asset tests, and holding periods — and shares bought on the secondary market generally don't qualify, because QSBS must be acquired at original issuance.
A founder holds QSBS-qualifying stock acquired in 2026, sells the company five years later, and realizes $12M in gain on that stock. Because the stock was held over 5 years and falls under the $15M per-issuer cap, the full $12M gain is excluded from federal capital gains tax.
Confirm QSBS eligibility with a tax advisor at the time equity is issued, not at exit — the qualifying conditions (gross assets threshold, active business requirement) are locked in at issuance, and waiting until a sale to check eligibility is too late to fix a problem.
What's the QSBS exclusion cap after the 2025 tax law changes?
For QSBS acquired after July 4, 2025, the per-issuer exclusion cap is $15M (up from $10M) with a tiered holding-period schedule; stock acquired before that date remains subject to the prior $10M cap and full 5-year holding requirement.
Do all startup shares qualify for QSBS treatment?
No — the issuing company must be a qualifying domestic C-corp under a gross-assets threshold at issuance, engaged in an eligible active trade or business (certain service industries are excluded), and the stock generally must be acquired directly from the company rather than purchased secondhand.
What are the QSBS holding periods for stock acquired after the 2025 law change?
Under Section 1202's current table, stock acquired after the change can exclude 50% of gain after three years, 75% after four years, and 100% after five years or more. Stock acquired earlier follows the prior rules.
Does QSBS stock bought on the secondary market qualify?
Generally no. QSBS must be acquired at original issuance from the company — for cash, property, or services — so shares bought from another holder usually don't qualify.
Does QSBS also eliminate state taxes?
Not necessarily. Section 1202 is a federal exclusion, and state conformity varies, so check your state's treatment with a tax advisor.
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