Qualified Small Business Stock (QSBS / Section 1202)
Stock in a qualified C corporation that, if held more than five years and meeting issuance requirements, can exclude up to $10 million or 10x basis from federal capital gains tax.
Detailed Explanation
Under IRC Section 1202, founders, employees, and early investors who acquire QSBS at original issuance and hold for more than five years can exclude the greater of $10 million or 10x adjusted basis per issuer from federal capital gains. The issuing corporation must be a domestic C-corp with gross assets of $50 million or less at issuance, conducting an active business outside of finance, professional services (law, health, accounting), and a few other excluded sectors. State conformity varies (California does not conform; Pennsylvania does). Stacking strategies allow multiple family members or trusts to multiply the exclusion.
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Learn about Tax Planning & StrategyRelated Terms
Capital Gain
The profit realized from the sale of a capital asset such as stock, real estate, or cryptocurrency, taxed at preferential rates if held longer than one year.
Tax Bracket
A range of taxable income subject to a specific marginal tax rate under the federal progressive income tax system.
Incentive Stock Option (ISO)
An employer-granted option to purchase company stock that, if held long enough, qualifies for preferential long-term capital gain treatment but creates Alternative Minimum Tax (AMT) on exercise.
Non-Qualified Stock Option (NQSO / NSO)
An employer-granted stock option that creates ordinary income at exercise equal to the bargain element, with employer-side payroll tax withholding.
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