What it means
Qualified small business stock (QSBS) is stock in a US C corporation that, if it meets the conditions in Section 1202 of the tax code, lets the holder exclude some or all of the gain from federal income tax on a sale. For founders and early employees of a company that does well, that can be millions of dollars of gain taxed at zero federally.
The stock has to be acquired at original issue, meaning directly from the company, and the company has to be small and in a qualifying business when it issues the shares.
The company must be a C corporation, and its gross assets must stay under the limit up to and immediately after the shares are issued. It has to run an active business for substantially all of the time you hold the stock, and some fields don't qualify, including health, law, consulting and financial services. Then the holder has to keep the shares long enough.
For stock issued after July 4, 2025, the exclusion is 50% after three years, 75% after four and 100% after five. The gross asset limit is $75 million, and the cap on excludable gain per company is the greater of $15 million or ten times your basis. Stock issued on or before July 4, 2025 keeps the earlier rules: held more than five years, a $50 million asset limit and a $10 million cap. On a 50% or 75% exclusion, the part that isn't excluded is taxed at 28%, above the 20% top rate on other long-term gains. The new limits rise with inflation after 2026.
A founder buys 2,000,000 shares for $200 in 2026, when the company's gross assets are far below $75 million. Six years later she sells them for $12 million. Her gain is under the $15 million cap, so after five years all of it can be excluded from federal income tax. Had she sold after three years, half would be excluded. The holding period usually starts at exercise for options, or at grant for restricted stock with an 83(b) election. The exclusion is federal only; California, for one, taxes the whole gain.
Why it matters. It can be worth millions to founders and early employees, and it depends on records the company keeps: when shares were issued, gross assets at the time, and that the business stayed qualified.
Try it with your numbers
Change any number. The working below updates as you type.
Excluded = Exclusion % × min(Gain, greater of $15M/$10M limit or 10 × basis)Original issue date.
In earlier years.
Gain excluded from federal income tax
$11,999,800.00
How it’s worked out
- 1Which rules applyAcquired 2026-03-02Acquired after Jul 4, 2025: 50% / 75% / 100% at 3 / 4 / 5 years
- 2Whole years held2026-03-02 to 2032-03-026
- 3Exclusion6 whole years held100%
- 4Gain$12,000,000.00 − $200.00$11,999,800.00
- 5Per-company capgreater of ($15,000,000.00 − $0.00) or 10 × $200.00$15,000,000.00
- 6Gain countedmin($11,999,800.00, $15,000,000.00)$11,999,800.00
- 7Excluded100% × $11,999,800.00$11,999,800.00
- 8Gain still taxable$11,999,800.00 − $11,999,800.00$0.00
| Held at least | Sell on or after | Excluded |
|---|---|---|
| 3 years | Fri, Mar 2, 2029 | 50% |
| 4 years | Sat, Mar 2, 2030 | 75% |
| 5 years | Sun, Mar 2, 2031 | 100% |
Assumes the stock qualifies: acquired at original issue from a US C corporation whose gross assets were $50M or less ($75M for stock issued after July 4, 2025), an active qualifying business, and a holder that isn't a corporation. Holding periods count from the day after you acquire the stock. Gain not excluded at the 50% or 75% steps is taxed at up to 28%, not the usual 20%. The $15M limit is indexed for inflation for tax years beginning after 2026, which this doesn't model. General information; confirm with your CPA.
Common questions
What changed in 2025?
For stock issued after July 4, 2025, the exclusion is 50% after three years, 75% after four and 100% after five. The gross asset limit rose to $75 million, and the per-company cap is the greater of $15 million or ten times basis.
Does QSBS apply to my options?
Options aren't stock. The holding period starts when the stock is acquired, generally on exercise, or at grant for restricted stock with an 83(b) election. Check timing with a tax advisor.
Does the company have to do anything?
The company must stay a qualifying C corporation running an active business, and it holds the records that prove it. Many startups keep a QSBS file and send attestations on request.
Where it comes up
The glossary entries, founder guides and lessons on this site that use the term and link here.
Read further
General information for US companies, not tax, legal or accounting advice. Check the specifics with a CPA before you act on them.