# 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.

Source: https://lopifi.com/learn/qsbs-section-1202
Part of: Lopifi — US GAAP books on autopilot, checked by a CPA (https://lopifi.com)

---

**What is QSBS (Section 1202), and how much gain can founders exclude after the 2025 changes?** 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](https://lopifi.com/md/glossary/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.

> “the date of the enactment of this paragraph”

— [26 U.S.C. §1202(a)(5)–(6) (as amended by Pub. L. 119-21)](https://www.law.cornell.edu/uscode/text/26/1202), QSBS: 50% after three years, 75% after four, 100% after five, for stock acquired after July 4, 2025

> “10 times the aggregate adjusted bases of qualified small business stock issued by such corporation”

— [26 U.S.C. §1202(b)(1), (d)(1), (e)(1)](https://www.law.cornell.edu/uscode/text/26/1202), QSBS: the per-issuer cap, the gross assets test and the active business test

> “any trade or business involving the performance of services in the fields of health, law, engineering,”

— [26 U.S.C. §1202(c)(2)(A), (e)(3)(A)](https://www.law.cornell.edu/uscode/text/26/1202), QSBS: a C corporation for substantially all of the holding period, in a qualified business

> **Northwind's founder stock was issued on September 1, 2026, after July 4, 2025 — so the new 3-, 4- and 5-year steps apply.**

| Sold on | Years held | Excluded % | Gain | Excluded | Taxable gain |
| --- | --- | --- | --- | --- | --- |
| August 31, 2029 | 2 | 0% | $19,970,000 | $0 | $19,970,000 |
| September 1, 2029 | 3 | 50% | $19,970,000 | $7,500,000 | $12,470,000 |
| September 1, 2030 | 4 | 75% | $19,970,000 | $11,250,000 | $8,720,000 |
| September 1, 2031 | 5 | 100% | $19,970,000 | $15,000,000 | $4,970,000 |

One founder's block (basis $30,000) sold for an illustrative $20,000,000, assuming it stays QSBS throughout. The $15 million limit's inflation adjustment for years after 2026 is not modeled.

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.

*[Figure: vesting]*

The 83(b) election makes the founders' purchase the moment the stock is taxed — the date QSBS's clock counts from.

> **Ways to lose it.** The company stops being a C corporation for substantially all of the holding period, or stops using 80% of its assets in a qualified business, or redeems stock from the holder (or significantly from others) around the issue date — §1202(c)(3) looks from two years before the issue to two years after. Services in fields such as health, law, engineering, accounting, consulting and financial services are not qualified businesses.

In this lesson: secondary sales, and why the buyer's shares are not QSBS.

## Pages in this lesson

- [Secondary sales](https://lopifi.com/md/learn/qsbs-section-1202/secondary-sales) — 3 min. What is a secondary sale of startup stock?

## Where this lesson's rules come from

- [26 U.S.C. §1202(a)(5)–(6) (as amended by Pub. L. 119-21)](https://www.law.cornell.edu/uscode/text/26/1202) — QSBS: 50% after three years, 75% after four, 100% after five, for stock acquired after July 4, 2025 (statute)
- [26 U.S.C. §1202(b)(1), (d)(1), (e)(1)](https://www.law.cornell.edu/uscode/text/26/1202) — QSBS: the per-issuer cap, the gross assets test and the active business test (statute)
- [26 U.S.C. §1202(c)(2)(A), (e)(3)(A)](https://www.law.cornell.edu/uscode/text/26/1202) — QSBS: a C corporation for substantially all of the holding period, in a qualified business (statute)

## Read further

- https://lopifi.com/md/startups/stock-options-409a-and-vesting
- https://lopifi.com/md/accounting/qsbs
- https://lopifi.com/md/accounting/83b-election

- **Track:** [Cap tables & raising](https://lopifi.com/md/learn/equity)
- **Lesson:** Lesson 9 of 10 — 8 min
- **Terms taught:** [Qualified small business stock](https://lopifi.com/md/glossary/qualified-small-business-stock), [Secondary sale](https://lopifi.com/md/glossary/secondary-sale), [83(b) election](https://lopifi.com/md/glossary/83-b-election)
- **Previous:** [Equity on the books: stock, SAFEs, notes and stock comp, Cap table · Lesson 8](https://lopifi.com/md/learn/equity-accounting-journal-entries)
- **Next:** [Secondary sales](https://lopifi.com/md/learn/qsbs-section-1202/secondary-sales)
- **The course:** https://lopifi.com/md/learn