# What is QSBS (Section 1202 Qualified Small Business Stock)?

Country: United States

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.

## 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.

Source: https://www.irs.gov/forms-pubs/about-publication-550

## Related terms

- [C-Corporation](https://accounts-os.com/us/glossary/c-corp)