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Tax & credits

QSBS (Qualified Small Business Stock)

Also known as Section 1202 stock, 1202 exclusion, small business stock exclusion

QSBS (IRC Section 1202) lets founders and investors exclude capital gains on qualifying C-corp stock from federal tax.

Updated July 2026·Sources: IRC Sec. 1202; One Big Beautiful Bill Act (enacted July 2025)

Key takeaways

  1. Up to $15M (or 10x basis) of gain excluded per issuer; older stock capped at $10M
  2. QSBS can make the difference between paying roughly 20%+ federal tax on an exit and paying zero, potentially saving founders and early investors millions.

What is qsbs (qualified small business stock)?

QSBS (IRC Section 1202) lets founders and investors exclude capital gains on qualifying C-corp stock from federal tax. For stock issued after July 4, 2025, the One Big Beautiful Bill Act created a tiered exclusion (50% at 3 years, 75% at 4, 100% at 5) with a $15M cap and $75M gross-asset limit. Earlier stock keeps the old 5-year, $10M rules.

Worked example

A founder is issued QSBS in August 2025 in a startup with $20M in gross assets, then sells five years later for a $12M gain. Because the stock was issued after July 4, 2025 and held five-plus years, the full $12M is excluded from federal capital gains tax, under the pre-2025 rules that gain would have been capped at $10M.

Benchmarks by stage

For stock issued after July 4, 2025: tiered exclusion of 50%/75%/100% at 3/4/5-year holding, $15M per-issuer cap, $75M gross-asset ceiling (the $15M and $75M figures are inflation-indexed for tax years beginning after 2026). For stock issued on or before July 4, 2025: flat 100% exclusion only after 5 years, $10M cap, $50M gross-asset ceiling.

Source: IRC Sec. 1202; One Big Beautiful Bill Act (enacted July 2025) (2026)

Why it matters for fast-growing companies

QSBS can make the difference between paying roughly 20%+ federal tax on an exit and paying zero, potentially saving founders and early investors millions. To qualify, the company must be a domestic C-corp with gross assets under the threshold when stock is issued, so how and when a startup incorporates and raises directly affects whether its equity ever earns the exclusion.

Frequently asked questions

What holding period does QSBS require?+
For stock issued after July 4, 2025, a new tiered rule applies: exclude 50% of gain after 3 years, 75% after 4 years, and 100% after 5 years. For stock issued on or before that date, only the flat 5-year holding period qualifies, and it must be met in full to exclude any gain.
How much gain can QSBS exclude?+
Stock issued after July 4, 2025 can exclude up to the greater of $15 million or 10 times your basis, per issuer. Stock issued on or before that date keeps the older $10 million (or 10x basis) cap even if sold later. The dollar caps are per company, not per shareholder in aggregate.
What are the requirements for stock to qualify as QSBS?+
The issuer must be a domestic C-corporation with aggregate gross assets at or under the threshold ($75M for post-July 4, 2025 stock, $50M before) when the stock is issued, the stock must be acquired at original issuance, and the company must run an active qualified trade or business. Certain service businesses are excluded.

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