Definition
Qualified Small Business Stock (QSBS) can allow eligible founders and investors to exclude part or all of the gain on qualifying C-corporation stock under Section 1202, depending on acquisition date, holding period, company qualifications, and statutory limits.
How It Works
QSBS rules were expanded under recent law. Updated rules can allow an exclusion reaching $15M for qualifying stock, increased the gross asset threshold to $75M, and may provide shorter or tiered holding-period treatment for qualifying stock depending on acquisition date. Legacy 5-year, $10M, and $50M rules may still apply to older stock.
Example
An early employee receives founder-level stock in a qualifying tech C-corp, holds it more than five years, and sells with a large gain that falls within the exclusion cap, owing no federal tax on it.
When It Works Best
It works best for founders, early employees, and angel investors who plan around the requirements from the moment they acquire the stock.
Who It Applies To
Shareholders of qualifying small C-corporations who meet the holding and issuance rules.
Watch-Outs
QSBS eligibility is highly technical. Acquisition date, original issuance, active-business status, gross assets, redemptions, entity type, and holding period all matter.
