What is qualified small business stock (QSBS)?

Takeaway: QSBS under Section 1202 of the Internal Revenue Code is one of the most valuable tax incentives available to startup founders, employees, and investors—offering the potential to exclude millions in capital gains from federal tax. Recent legislation has expanded its benefits and flexibility.

Section 1202 provides a capital gains exclusion for the sale of Qualified Small Business Stock (QSBS). When structured and planned correctly, QSBS treatment can be worth millions in tax savings. The One Big Beautiful Bill Act (OBBBA), effective for QSBS acquired after July 4, 2025, has made this incentive even more favorable.

The New QSBS Framework Under the OBBBA

1. Tiered Gain Exclusion Based on Holding Period

Previously, you had to hold QSBS for 5+ years to receive the full exclusion. Under the new law:

  • 3 to 4 years: 50% exclusion of gain

  • 4 to 5 years: 75% exclusion of gain

  • 5+ years: 100% exclusion of gain

Stock acquired on or before July 4, 2025, still requires a 5-year holding period for the full 100% exclusion.

2. Increased Gain Exclusion Cap

For QSBS acquired after July 4, 2025:

  • The greater of $15 million in excluded gain per issuer (up from $10M, inflation-adjusted starting 2027), or

  • 10x your tax basis in the stock (unchanged).

3. Higher Corporate Gross Assets Threshold

The maximum gross assets a company can have and still issue QSBS increases from $50M to $75M before or immediately after issuance (inflation-adjusted starting 2027). This extension benefits capital-intensive sectors like biotech, cleantech, and aerospace.

QSBS Fundamentals That Haven’t Changed

  • Issuer must be a domestic C-Corporation.

  • Stock must be acquired at original issuance (not in a secondary sale).

  • The company must be engaged in a qualified trade or business (some industries, like certain professional services and finance, are excluded).

  • The company must have avoided certain disqualifying stock redemptions.

Why This Matters

With OBBBA’s changes, QSBS now offers more flexibility for earlier exits, larger gain exclusions, and broader eligibility for companies to issue qualifying stock. For founders and early employees, securing QSBS status—and holding long enough to maximize the exclusion—can be one of the most impactful wealth-planning moves in the startup lifecycle.

Disclaimer: This post is for general informational purposes only and does not constitute legal, tax, or financial advice. Reading or relying on this content does not create an attorney–client relationship. Every startup’s situation is unique, and you should consult qualified legal or tax professionals before making decisions that may affect your business.