QSBS (qualified small business stock) lets a non-corporate taxpayer exclude federal gain on a sale of stock in a domestic C corporation, if the shares were acquired at original issuance, the company met the tests at that issuance, and you hold the stock long enough. For stock acquired after July 4, 2025, the exclusion is 50% after three years, 75% after four years, and 100% after five years or more, capped at the greater of $15 million or 10 times your adjusted basis (26 U.S.C. § 1202; Pub. L. 119-21 § 70431). For stock issued after that date, the company's aggregate gross assets must not exceed $75 million immediately after the issuance, including the proceeds of that issuance. Stock acquired on or before July 4, 2025 keeps the older rules: more than five years, 100% if acquired after September 27, 2010, a $10 million cap (or 10 times basis), and a $50 million asset test. Not legal or tax advice.
This page covers the IRC § 1202 exclusion: who qualifies, the tests, the holding period, the per-issuer cap, and what changed in 2025. For the vesting and 83(b) election on your own shares, use founder vesting at a priced round. For the sale process itself, use how to sell a startup. There is no reliable public benchmark yet for how often Seed–Series B founders qualify for or claim the QSBS exclusion.
What changed in 2025
Section 70431 of Pub. L. 119-21 (H.R. 1) amended § 1202. Carta, Cooley, and Wilson Sonsini call that law the One Big Beautiful Bill Act. The enrolled text keys the new exclusion percentages and the $15 million cap to stock acquired after the applicable date, which § 1202(a)(6) defines as the date of enactment: July 4, 2025. The $75 million asset test applies to stock issued after that date (§ 70431(c)(3)).
Cooley (11 July 2025) and Wilson Sonsini (7 July 2025) follow that phrasing: new rules for stock acquired or issued after July 4, 2025. Wilson Sonsini's rate table dates new-rule stock from July 5, 2025. Carta's comparison table (13 October 2026, updated 27 October 2026) dates the new asset limit, tiers, and $15 million cap to shares issued on or after July 4, 2025. The statute and Cooley use after July 4, 2025. Treat a July 4, 2025 issuance with counsel rather than averaging the two phrasings.
| Rule | Stock acquired on or before July 4, 2025 | Stock acquired after July 4, 2025 |
|---|---|---|
| Holding period | More than 5 years | At least 3 years to start; full exclusion at 5 years |
| Exclusion | 100% if acquired after September 27, 2010; 75% if acquired after February 17, 2009 and on or before September 27, 2010; 50% if earlier (§ 1202(a)(3)–(4)) | 50% at 3 years, 75% at 4 years, 100% at 5 years or more (§ 1202(a)(5)) |
| Per-issuer dollar cap | Greater of $10 million or 10 times adjusted basis | Greater of $15 million or 10 times adjusted basis |
| Inflation on the dollar cap | None | For tax years beginning after 2026, the $15 million amount adjusts (§ 1202(b)(5); Cooley: beginning in 2027) |
| Gross-asset ceiling at issuance | $50 million | $75 million for stock issued after July 4, 2025 (§ 70431(c)) |
The $15 million and $75 million figures also adjust for inflation for tax years beginning after 2026, rounded to the nearest $10,000 (Pub. L. 119-21 § 70431; Cooley). On a separate return by a married individual, the statute halves the dollar cap: $5 million in place of $10 million, and one-half of the $15 million amount then in effect. Cooley states that later figure as $7.5 million. Wilson Sonsini states the later married-filing-separately cap as $10 million. Keep those two reads separate.
The 10-times-basis limit did not change (§ 1202(b)(1)(B); Cooley). Carta's illustration: an investor who put in $15 million could exclude federal gain on up to $150 million if 10 times basis is the greater cap.
Who can claim it
The taxpayer must be someone other than a corporation (§ 1202(a)). Individuals qualify. Partners and other holders of a pass-through that itself acquired and held the stock can claim it too, subject to § 1202(g). Corporate holders do not get the exclusion.
The stock must be stock in a domestic C corporation, originally issued after August 10, 1993, and acquired by you at its original issue, directly or through an underwriter, in exchange for money or other property (not including stock), or as compensation for services (§ 1202(c)(1)). Wilson Sonsini: an S corporation or a partnership (including a multi-member LLC) cannot issue QSBS. Carta: convert to a C corporation before the shares are issued if you want them to be eligible.
Carta treats stock received on exercise of options (ISOs or NSOs), warrants, or convertible instruments such as a SAFE as acquired at original issuance, because the shares come from the company. Buying shares from another holder on a secondary sale does not meet the original-issuance test. Transfers by gift, at death, or from a partnership to a partner can carry the transferor's acquisition manner and holding period (§ 1202(h)). Wilson Sonsini: stock received for services and covered by an 83(b) election is treated as acquired on the effective date of that election. Plan the 83(b) clock and the QSBS holding period together.
Stock issued in exchange for other stock fails original issuance, because § 1202(c)(1)(B)(i) excludes property that is stock. Limited reorganization rules in § 1202(h)(4) can preserve QSBS already in hand, with a gain limitation unless the new issuer is itself a qualified small business at the exchange. Do not assume a reorganization turns non-qualifying shares into QSBS.
The VEN (Venture Executive Network) session judgment: check these tests at formation and at each new issuance. Do not wait until a sale to learn the stock did not qualify.
The tests the company must meet
Asset test at issuance
A qualified small business is a domestic C corporation whose aggregate gross assets did not exceed the ceiling at any time before the issuance, and do not exceed it immediately after, counting amounts received in that issuance (§ 1202(d)(1)). Aggregate gross assets means cash plus the adjusted tax bases of other property. Contributed property is counted at fair market value at contribution (§ 1202(d)(2)). Parent-subsidiary groups above a more-than-50% threshold are aggregated (§ 1202(d)(3)).
The ceiling is $75 million for stock issued after July 4, 2025, and $50 million for earlier stock (Pub. L. 119-21 § 70431(c); Carta; Cooley; Wilson Sonsini). Crossing the ceiling later does not rewrite an earlier issuance that already cleared the test then. It can block new issuances from qualifying.
Active business during the hold
During substantially all of your holding period, the corporation must remain a C corporation and meet the active-business test: at least 80% (by value) of its assets used in the active conduct of one or more qualified trades or businesses (§ 1202(c)(2), (e)(1)). Carta calls waiting until an exit to check this the "substantially all" trap.
A qualified trade or business is any trade or business other than the list in § 1202(e)(3): services in health, law, engineering, architecture, accounting, actuarial science, performing arts, consulting, athletics, financial services, or brokerage services; a business whose principal asset is the reputation or skill of one or more employees; banking, insurance, financing, leasing, investing, or similar; farming; certain natural-resource businesses; and operating a hotel, motel, restaurant, or similar business.
Working capital and cash held for research or near-term working-capital needs can count toward the 80% test, with a limit: after the corporation has existed at least two years, no more than 50% of its assets may qualify as active under that working-capital rule (§ 1202(e)(6)). Carta flags large investments in longer-than-24-month instruments, and a pivot into an excluded service business, as common ways to lose the test.
Redemptions
Stock you acquire is not QSBS if, during the four-year period that starts two years before issuance, the corporation bought any of its stock from you or a related person. A significant redemption also taints stock issued during the two-year period that starts one year before issuance, if purchases in that window exceed 5% of the value of all of the corporation's stock as of the beginning of the window (§ 1202(c)(3)). Wilson Sonsini and Carta both treat buybacks near an issuance as a diligence item.
Holding period, cap, and leftover tax
For stock acquired after July 4, 2025, eligible gain means gain on QSBS held at least three years. The exclusion percentage then follows the table in § 1202(a)(5). For older stock, eligible gain still requires a hold of more than five years (§ 1202(b)(2)).
The amount of eligible gain you may take into account for one issuer, in a year, cannot exceed the greater of the applicable dollar limit or 10 times the aggregate adjusted bases of the QSBS of that issuer that you disposed of that year. Basis additions after original issuance are ignored for the 10-times test (§ 1202(b)(1)).
Cooley: the portion of eligible gain that is not excluded is taxed at a 28% rate rather than the standard 20% long-term capital-gains rate, so the effective rate is 14% at a 50% exclusion and 7% at a 75% exclusion, before the 3.8% net investment income tax. Wilson Sonsini publishes effective maximum rates including that 3.8% NIIT of 15.9% (50% exclusion) and 7.95% (75% exclusion), and 0% when the exclusion is 100%. Excluded gain on post-September 27, 2010 stock is also excluded from the alternative minimum tax and from NIIT (Wilson Sonsini).
If you have to sell before the § 1202 hold is finished, Wilson Sonsini describes a § 1045 rollover: hold the original QSBS more than six months, sell it, and reinvest the proceeds in replacement QSBS within 60 days. That is a separate statute, not an automatic backup.
Carta notes that the federal exclusion does not apply to state tax on its own. As of its October 2026 guide, residents of Alabama, California, Mississippi, Pennsylvania, and Puerto Rico do not get a matching state exclusion; Hawaii and Massachusetts partially conform. Confirm current state treatment with counsel.
Labeled example
Editorial arithmetic. Not a company and not tax advice.
You acquired stock after July 4, 2025 for $100,000 cash, which is your basis. You later sell all of it. Gain is $12,000,000. Ten times basis is $1,000,000. The dollar limit is $15,000,000. The cap is the greater of those two figures, so the full $12,000,000 is eligible.
| Holding period | Exclusion | Excluded gain | Eligible gain still taxable |
|---|---|---|---|
| 3 years | 50% | $6,000,000 | $6,000,000 |
| 4 years | 75% | $9,000,000 | $3,000,000 |
| 5 years or more | 100% | $12,000,000 | $0 |
If the same sale produced $22,000,000 of gain after a five-year hold, only $15,000,000 would be eligible under the dollar cap. You would exclude $15,000,000. The other $7,000,000 sits above the per-issuer limit, so § 1202 does not apply to that slice. Cooley and Wilson Sonsini describe a different leftover: the unexcluded percentage of eligible gain at the 50% or 75% tiers.
Founder QSBS checklist
- Confirm the issuer is a domestic C corporation before the shares go out (Carta; Wilson Sonsini).
- Take the shares at original issuance for money, property other than stock, or services. Do not rely on a secondary purchase (§ 1202(c)).
- Run the asset test on the issuance date, including cash received in that issuance. Use $75 million after July 4, 2025 and $50 million for earlier stock.
- Check the business against § 1202(e)(3) and keep at least 80% of assets in a qualified active business for substantially all of the hold.
- Watch redemptions in the statutory windows around the issuance (§ 1202(c)(3)).
- Calendar the hold from your acquisition date. New stock: 3 / 4 / 5 years. Older stock: more than 5 years.
- File an 83(b) if you received restricted stock, so the holding period can start on the election date (Wilson Sonsini). See founder vesting and 83(b).
- Keep a file of incorporation records, board consents, cap table issuances, asset-test workpapers, and periodic attestation. Carta: the taxpayer has to prove eligibility, often years later.
- Before a sale, re-run the tests and the cap, including any earlier § 1202 gain you already used on the same issuer. For the process around the deal, use how to sell a startup.
- Ask counsel about state tax and any § 1045 rollover if you may sell before the federal hold is done.
Where founders get this wrong
Treating LLC or S-corp equity as QSBS. Only a C corporation can issue it (Carta; Wilson Sonsini).
Assuming a secondary purchase qualifies. Original issuance is the default rule. Gift, death, and certain partnership transfers are the listed exceptions (§ 1202(c), (h)).
Ignoring the asset test immediately after a round. The proceeds count. A round that pushes aggregate gross assets through $75 million (or $50 million on older stock) can make the new shares ineligible even if earlier shares were fine.
Checking the company only at issuance. The 80% active-business test has to hold for substantially all of your holding period. A pile of idle cash after year two, or a pivot into an excluded service business, can unwind the benefit (Carta; § 1202(e)).
Applying the 2025 tiers to older stock. Stock acquired on or before July 4, 2025 still needs more than five years and uses the $10 million cap (Cooley; § 1202(a)–(b)).
Forgetting state tax. Carta: California and several other states do not follow the federal exclusion.
Waiting until the sale to build the file. Carta: reconstructing years of asset and business tests after the fact is how claims get dropped.
Pair this with
- Founder vesting at a priced round for the 83(b) election that can start your QSBS holding period on restricted founder stock.
- How to sell a startup for the sale process during which you claim the exclusion.
- 409A after a priced round if you are granting or exercising options after a financing, which is a new original issuance.
- SAFE vs priced round if the next money will convert into C-corp stock.
Sources
- 26 U.S.C. § 1202, Cornell LII, checked 8 November 2026. Taxpayer other than a corporation; original-issuance definition; active-business and 80% tests; excluded businesses; $75 million aggregate-gross-assets test in the current text of § 1202(d); per-issuer limit of the applicable dollar amount or 10 times basis; applicable date defined as the date of enactment of § 1202(a)(6); 50% / 75% / 100% table for stock acquired after that date and held 3 / 4 / 5 years; $10 million and $15 million dollar limits; inflation adjustment for the $15 million amount in tax years beginning after 2026; redemption windows; gift, death, and partnership tacking; notes that Pub. L. 119-21 was approved July 4, 2025 and that the Creating Small Business Jobs Act of 2010 was approved September 27, 2010.
- Pub. L. 119-21 § 70431, enacted July 4, 2025 (H.R. 1; 139 Stat. 240–242). Expansion of the qualified small business stock gain exclusion: new § 1202(a)(1), (a)(5), and (a)(6); $15 million applicable dollar limit for stock acquired after the applicable date; inflation adjustment after 2026; married-filing-separately half-limit; substitution of $75 million for $50 million in § 1202(d)(1), effective for stock issued after the date of enactment.
- Carta, Qualified small business stock (QSBS). Michael Sechuga, 13 October 2026, updated 27 October 2026. Comparison table dating new rules to shares issued on or after July 4, 2025 ($75 million assets, 3/4/5-year tiers at 50/75/100%, $15 million or 10x cap) and prior rules to shares issued before that date ($50 million, more than five years, $10 million or 10x); C corporation only; original issuance, including option, warrant, and SAFE exercise; secondary purchases ineligible; 80% active-business test and excluded service fields; redemption and working-capital pitfalls; taxpayer must prove eligibility; investor illustration of $15 million in / up to $150 million excluded; states that do not conform (Alabama, California, Mississippi, Pennsylvania, Puerto Rico) and partial conformity (Hawaii, Massachusetts).
- Cooley, The One Big Beautiful Bill Act Expands QSBS Benefits. 11 July 2025. Side-by-side of prior law (stock acquired on or before July 4, 2025) and new law (stock acquired after July 4, 2025); 50/75/100% at 3/4/5 years; $10 million vs $15 million cap ($5 million vs $7.5 million married filing separately); $50 million vs $75 million assets; leftover eligible gain taxed at 28%, for effective rates of 14% and 7% before the 3.8% NIIT; inflation adjustments beginning in 2027.
- Wilson Sonsini, Understanding Section 1202: The Qualified Small Business Stock Exemption. 7 July 2025. Eligibility list (non-corporate holder, domestic eligible C corporation, original issuance, 80% active business, asset ceiling, redemption windows); rate table dating new-rule stock from July 5, 2025; 100% exclusion from federal capital gains, AMT, and 3.8% NIIT when the percentage is 100%; leftover gain generally taxed at 28% plus NIIT; effective maximum rates including NIIT of 15.9% and 7.95% at the 50% and 75% tiers; married-filing-separately caps stated as $5 million and $10 million; § 1045 rollover after more than six months if replacement QSBS is purchased within 60 days; 83(b) stock treated as acquired on the election date.
- VEN (Venture Executive Network). Session judgment, 2026: confirm QSBS at formation and at each issuance rather than at the sale. Not a survey. No closed-session numbers.
Related
- Equity & cap table
- Founder vesting at a priced round
- How to sell a startup
- 409A after a priced round
- SAFE vs priced round
Founders who have structured issuance and later sold QSBS-eligible stock will pressure-test your C-corp setup, your holding period, and your sale file in a VEN session.
Go deeper: VEN playbook note on qualified small business stock