QSBS (Section 1202) and secondary sales
Original issue, a C corporation, $75 million of gross assets, and the 3-, 4- and 5-year steps — on a Northwind founder's sale.
Qualified small business stock lets a non-corporate holder exclude gain on a sale from federal income tax. The stock must be acquired at original issue from a domestic C corporation whose gross assets were $75 million or less immediately before and after the issue, using at least 80% of its assets in a qualified business. For stock acquired after July 4, 2025, the exclusion is 50% after three years, 75% after four and 100% after five, on gain up to the greater of $15 million or ten times the holder's basis, per company. Stock acquired earlier keeps the old rules.
Northwind's founder stock was issued on September 1, 2026, after July 4, 2025 — so the new 3-, 4- and 5-year steps apply.
The per-company cap is the greater of $15 million or ten times basis: ten times $30,000 is $300,000, so the $15 million governs, and even at five years $4,970,000 of the gain is taxable.
In this lesson: secondary sales, and why the buyer's shares are not QSBS.
Pages in this lesson
1 page goes deeper, about 3 minutes in all. Read them in order, or open the one you need.
Where this lesson's rules come from
The sources behind this lesson's requirements, by kind. Anything marked as a convention is ours, not the rule-maker's.
- Federal statute
- 26 U.S.C. §1202(a)(5)–(6) (as amended by Pub. L. 119-21) (opens in a new tab)QSBS: 50% after three years, 75% after four, 100% after five, for stock acquired after July 4, 2025Free to read
- 26 U.S.C. §1202(b)(1), (d)(1), (e)(1) (opens in a new tab)QSBS: the per-issuer cap, the gross assets test and the active business testFree to read
- 26 U.S.C. §1202(c)(2)(A), (e)(3)(A) (opens in a new tab)QSBS: a C corporation for substantially all of the holding period, in a qualified businessFree to read
The words this lesson teaches
Each links to its glossary definition, which also names the authority behind it and the components that render it.
- Qualified small business stockOriginal-issue stock of a domestic C corporation with gross assets of $75 million or less at issuance that lets holders exclude gain on sale — for stock issued after July 4, 2025, 50% after three years, 75% after four and 100% after five, up to the greater of $15 million or ten times basis per issuer. Stock issued earlier keeps the old rules: $50 million of gross assets, five years, $10 million
- Secondary saleA shareholder selling existing shares to a buyer, rather than the company issuing new ones. The company receives nothing; the buyer's shares are not original issue, so they are not QSBS in the buyer's hands, and the company's right of first refusal and transfer restrictions usually apply
- 83(b) electionAn election, filed with the IRS within 30 days of receiving restricted stock, to be taxed on its value at grant rather than as it vests — at a founder's purchase price, usually no tax at all, and the capital gain holding period starts at once
In the founder glossary
This lesson’s ideas, explained for the founder running the company. Each has an entry in the founder glossary.
See also
- Stock options, 409A valuations and vesting for startupsHow option strike prices are set by a 409A valuation, how vesting and the cliff work, and why ASC 718 makes every grant an expense on your P&L.
- 83(b) electionA filing that tells the IRS to tax restricted stock when you receive it, not as it vests. It has to be filed within 30 days of the transfer, and there's no extension.