Qualified Small Business Stock (QSBS / Section 1202)
Stock in a qualified C corporation that, if issuance and holding-period requirements are met, can exclude a capped amount of gain from federal capital gains tax, with OBBBA raising the cap and adding a tiered exclusion for stock acquired after July 4, 2025.
Detailed Explanation
Under IRC Section 1202, founders, employees, and early investors who acquire QSBS at original issuance can exclude gain per issuer from federal capital gains tax. OBBBA created two regimes divided by an applicable date of July 4, 2025. Stock acquired on or before July 4, 2025 follows the prior rules: a holding period of more than five years and an exclusion capped at the greater of $10 million or 10x adjusted basis. Stock acquired after July 4, 2025 uses a tiered exclusion based on holding period, 50% at three years, 75% at four years, and 100% at five years or more, with the per-issuer cap raised to $15 million; the alternative 10x-basis cap is unchanged and still available as the greater-of. The corporate gross-asset ceiling also rose from $50 million to $75 million, but that change is keyed to stock issued after July 4, 2025, a different trigger than the acquisition test above. For tax year 2026 the $15 million and $75 million amounts apply exactly as written and are not indexed; inflation indexing begins in tax year 2027. The issuing corporation must be a domestic C-corp 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.
Key Points
- Stock acquired on or before July 4, 2025: more than 5-year hold, exclusion capped at the greater of $10 million or 10x basis.
- Stock acquired after July 4, 2025: tiered exclusion of 50% at 3 years, 75% at 4 years, and 100% at 5 or more years, with the cap raised to the greater of $15 million or 10x basis.
- Stock must be acquired at original issuance from a domestic C corporation running an active qualifying business.
- Gross-asset ceiling at issuance is $50 million, raised to $75 million for stock issued after July 4, 2025.
- Excluded businesses include finance, law, health, accounting, consulting, and a few other service sectors.
- State conformity varies (California does not conform; Pennsylvania does).
Practical Example
A founder receives QSBS at formation in 2026 with a $50,000 basis. Six years later the company sells and her shares are worth $9 million. Because the stock was acquired after July 4, 2025 and held more than five years, the exclusion is 100%, and the entire $8.95 million gain sits below the $15 million per-issuer cap, so it is excluded from federal capital gains tax. A resident of a non-conforming state like California would still owe state tax on the gain.
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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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