What is QSBS (Section 1202 Qualified Small Business Stock)?
Section 1202 of the Internal Revenue Code allows founders and early investors in qualifying C-corps to exclude up to $10 million (or 10× basis, whichever is greater) of capital gain from federal tax when they sell their shares, provided the stock has been held for at least 5 years and several other tests are met.
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Current Rate (Applies on sale; 5-year holding period required)
100% gain exclusion up to $10m / 10× basis (federal)
Example
Founder invests $50,000 to buy QSBS-eligible stock in a Delaware C-corp. After 6 years, they sell for $8 million. Federal capital gains tax: $0 (entire $7.95m gain excluded). Without QSBS: ~$1.9m federal tax (23.8%).
How QSBS (Section 1202 Qualified Small Business Stock) works in United States
Requirements: - Stock issued by a domestic C-corp (no LLC, S-corp or foreign entity) - Active trade or business (not investment holding) - Aggregate gross assets ≤ $50m at issuance - Acquired at original issuance (not secondary purchase) - Held continuously for at least 5 years - Excluded businesses: financial, professional services (law, health, accounting), hospitality, farming, mining, etc.
Some states (California, Pennsylvania) don't conform — full state tax still applies.
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