What is qualified small business stock (QSBS)?
Check whether the rules fit your situation, then review the worked example, requirements and records.
Available only when every requirement is met
Reviewed by Ebot Mbi, CPA, EA · Last reviewed · Law and figures current as of September 17, 2026
How it works
Check eligibility
Match the strategy to your facts, entity, timing, and the rules that apply.
Work through the numbers
Use the stated assumptions and compare the tax result with the cost and trade-offs.
Document and file
Keep contemporaneous records. Your external tax preparer handles return preparation and filing; this is not a tax-preparation service.
Which sounds like you?
Terms used in this guide
A deduction reduces taxable income; a credit reduces calculated tax; deferral changes when tax is due.
The Internal Revenue Code (IRC) is federal tax law; Treasury regulations explain its rules; IRS publications explain the agency's guidance.
- basis:
- the tax amount used to measure gain, loss or allowable deductions.
- pass-through:
- an entity whose tax items generally flow to its owners.
- S corporation:
- a corporation with an election generally passing tax items to shareholders.
- exclusion:
- an amount the applicable law permits you to leave out of taxable income.
- NIIT:
- net investment income tax, an additional tax that applies under specified conditions.
In brief
IRC §1202 lets noncorporate shareholders exclude gain on qualified small business stock. For stock issued after July 4, 2025, the exclusion is 50% if held at least 3 years, 75% if held at least 4 years, and 100% if held 5 years or more. It is generally capped at the greater of $15 million or 10 times basis per issuer.
Older stock needs a 5-year hold and has a $10 million cap. Many requirements must be met.
Key takeaways
- The issuer must be a domestic C corporation meeting a gross assets test ($75 million for stock issued after July 4, 2025; $50 million before).
- Stock must be acquired at original issue for money, property, or services.
- OBBBA's 3- and 4-year tiers apply only to stock issued after July 4, 2025, so the earliest 3-year date is in 2028.
- Many service fields, including health, law, accounting, consulting, and financial services, are excluded.
- Stock held through a partnership can qualify only under §1202(g)'s pass-through rules.
What it is
Qualified small business stock is stock in a domestic C corporation that meets the size and active-business requirements of IRC §1202 when the stock is issued and during most of the holding period. When a noncorporate shareholder sells QSBS after the required holding period, part or all of the gain is excluded from federal income tax.
The One Big Beautiful Bill Act (P.L. 119-21) expanded the exclusion for stock issued after July 4, 2025. It added partial exclusions for shorter holding periods, raised the per-issuer cap, and raised the gross assets limit.
What the law says
IRC §1202(a) provides the exclusion. As amended by P.L. 119-21, stock issued after July 4, 2025 qualifies for a 50% exclusion if held more than 3 years, 75% if held more than 4 years, and 100% if held more than 5 years.
IRC §1202(b) limits eligible gain per issuer to the greater of 10 times basis or a dollar cap: $10 million for stock issued on or before July 4, 2025, and $15 million for later stock, indexed for inflation after 2026.
IRC §1202(d) requires aggregate gross assets not to exceed $75 million (for post-July 4, 2025 stock) before and immediately after issuance. IRC §1202(e) requires an active business and excludes fields including health, law, engineering, architecture, accounting, actuarial science, performing arts, consulting, athletics, financial services, and brokerage services.
Requirements and tests
Each of these requirements must be met:
- The shareholder is not a corporation.
- The issuer is a domestic C corporation at issuance and during substantially all of the holding period.
- The stock is acquired at original issue, directly or through an underwriter, in exchange for money, property other than stock, or services.
- The gross assets test is met at and immediately after issuance.
- At least 80% of assets (by value) are used in the active conduct of a qualified trade or business during substantially all of the holding period.
- The holding period is met: more than 5 years for pre-July 5, 2025 stock; more than 3, 4, or 5 years for the tiered exclusion on later stock.
- No disqualifying redemptions around the issuance date.
How it works
When you sell, you determine the holding period and issue date to find the exclusion percentage, apply the per-issuer cap, and report the sale on Form 8949 and Schedule D. The taxable portion of a partially excluded gain is taxed at up to 28% under IRC §1(h); gain above the per-issuer cap is taxed at regular long-term capital gain rates (up to 20%). The 3.8% net investment income tax may apply to either.
A partnership or S corporation can hold QSBS and pass the exclusion through to partners or shareholders who held their interest when the stock was acquired, under IRC §1202(g). Gifts and transfers at death generally carry over the holding period. Some states do not follow the federal exclusion; Texas has no personal income tax.
Planning starts at formation. Founders often document the company's gross assets and the fair market value of property contributed at issuance, keep stock certificates or ledger entries that show original issuance, and review the business activity each year against the excluded fields. Because the cap applies per issuer and per taxpayer, some families consider gifts of stock to other taxpayers, which carry over the holding period.
IRC §1045 can also allow a tax-deferred rollover of gain from QSBS held more than 6 months into new QSBS purchased within 60 days, subject to its own rules.
Assumptions: Individual shareholder; stock issued in September 2025 at original issue by a qualifying C corporation.; Every other §1202 requirement is met; the gain is below the $15 million per-issuer cap.; Gain that is not excluded is taxed at the 28% maximum rate plus 3.8% NIIT (shareholder above the NIIT threshold).; Ordinary long-term capital gain (if no exclusion applies) is taxed at 20% plus 3.8% NIIT.; Ignores state tax and any alternative minimum tax effect.
| Sold after more than 5 years (after September 2030): excluded | $3,000,000 |
|---|---|
| Federal tax on the gain in that case | $0 |
| Sold after at least 3 but less than 4 years: excluded (50%) | $1,500,000 |
| Tax on the $1,500,000 included gain (28% + 3.8%) | $477,000 |
| Sold after 2 years: no exclusion; tax on $3,000,000 (20% + 3.8%) | $714,000 |
Under these assumptions, the holding period alone changes federal tax on the same gain from $714,000 to $0.
Illustration only; not a projection of your results.
Risks and IRS scrutiny
The exclusion is only as strong as the records behind it. The IRS may ask for proof of original issuance, gross assets at issuance, active-business status, and the nature of the business. A company whose activities drift into an excluded service field, or that holds too much investment property, can lose qualification.
Redemptions near the issuance date can disqualify stock.
If the exclusion is disallowed, the full gain is taxable and an accuracy-related penalty may apply.
Who it is not for
QSBS does not fit businesses in excluded service fields, companies organized as S corporations or partnerships (the issuer must be a C corporation), investors who bought shares from another shareholder rather than from the company, or owners who expect to sell before the required holding period. It also does not apply to corporate shareholders.
How ebotCPA helps
We test your stock against each requirement, assemble issuance and gross-asset records, track the holding period for each lot, and calculate the exclusion and cap at sale. We coordinate with your attorney, who drafts the legal documents.
Book a $497 Case Analysis to have Ebot Mbi, CPA, EA review your facts before you act.
Frequently asked questions
How long do I have to hold QSBS?
For stock issued after July 4, 2025, more than 3 years for a 50% exclusion, 4 years for 75%, and 5 years for 100%. Stock issued earlier must be held more than 5 years.
What is the QSBS exclusion limit?
Per issuer, the greater of 10 times your basis or $15 million for stock issued after July 4, 2025 ($10 million for earlier stock). The $15 million amount is indexed for inflation after 2026.
Can an LLC or S corporation issue QSBS?
No. The issuer must be a C corporation. An LLC taxed as a partnership can, however, hold QSBS and pass the exclusion through to eligible members.
Which businesses do not qualify for QSBS?
Fields such as health, law, engineering, architecture, accounting, actuarial science, performing arts, consulting, athletics, financial services, and brokerage services, plus banking, insurance, farming, certain extraction businesses, and hotels or restaurants.