Qualified Small Business Stock: A Founder Primer
Updated October 3, 2026
Qualified small business stock can create a significant federal tax benefit for eligible founders, employees, and investors. Section 1202 of the Internal Revenue Code may allow a noncorporate shareholder to exclude part or all of the gain from a qualifying sale or exchange.
The benefit is not automatic. It depends on the issuing corporation, the company's activities and assets, how the shareholder acquired the stock, the acquisition date, the holding period, company repurchases, and the exit structure.
Core QSBS requirements
In general:
The issuer must be a domestic C corporation when the stock is issued and during substantially all of the relevant holding period.
The corporation must satisfy the applicable aggregate-gross-assets test before and immediately after issuance.
The shareholder generally must acquire the stock at original issuance for money, eligible property, or services.
At least 80 percent of the corporation's assets generally must be used in one or more qualified active businesses during substantially all of the holding period.
The shareholder must satisfy the applicable holding period.
Company redemptions and certain shareholder transactions can affect eligibility.
Many professional services, financial, banking, insurance, farming, extraction, and hospitality businesses are excluded.
Current thresholds depend on the stock's date
For stock issued after July 4, 2025, the issuer's gross-assets threshold is generally $75 million before and immediately after the issuance. For stock issued on or before July 4, 2025, the threshold is generally $50 million.
For qualifying stock acquired after July 4, 2025, the exclusion percentage is 50 percent after at least three years, 75 percent after at least four years, and 100 percent after five years or more.
For qualifying stock acquired on or before July 4, 2025, the holding period is generally more than five years. Stock acquired after September 27, 2010 and on or before July 4, 2025 can generally qualify for a 100 percent exclusion if all requirements are satisfied.
Current gain limits
The per-issuer limit is generally the greater of a dollar limit or ten times the adjusted basis of the issuer's QSBS disposed of during the year, subject to detailed rules and prior-year use.
The dollar limit is generally $15 million for eligible post-July 4, 2025 stock and $10 million for eligible stock acquired on or before that date. The statute provides an inflation adjustment for the newer limit beginning after 2026.
Transactions that need special review
Do not assume QSBS is lost or preserved solely because a transaction is called a repurchase, asset sale, merger, conversion, or rollover.
A qualifying complete liquidation is generally treated as an exchange of stock at the shareholder level, although an asset sale can also create corporate-level tax.
A stock redemption may be treated as an exchange or as a dividend depending on section 302 and the facts.
Certain section 351 transactions and section 368 reorganizations can preserve QSBS treatment and tack the original holding period, subject to limitations.
A section 1045 rollover may defer gain when replacement QSBS is purchased within 60 days after a sale of QSBS held for more than six months. The replacement stock generally carries over the original holding period.
Read the detailed guide: Qualified Small Business Stock: Current Rules for Founders and Investors.
Build the record before the exit
Companies should preserve stock-issuance records, capitalization history, gross-assets support, business-activity information, conversion and reorganization documents, and repurchase records. A last-minute QSBS review may not be able to reconstruct missing facts.
QSBS is a shareholder tax position. Corporate counsel can help maintain the company record and flag transaction issues, but each shareholder should obtain tax advice about eligibility, elections, return reporting, and state treatment.
Frequently asked questions
What is qualified small business stock?
QSBS is generally stock issued by a qualifying domestic C corporation and acquired at original issuance for money, eligible property, or services. The issuer, shareholder, holding period, business activity, and transaction history must satisfy section 1202.
Which QSBS thresholds depend on the stock acquisition date?
For qualifying stock acquired after July 4, 2025, the gross-assets threshold is generally $75 million and the dollar exclusion limit is generally $15 million. For older stock, the corresponding figures are generally $50 million and $10 million.
What QSBS records should a company preserve?
Companies should keep stock-issuance records, capitalization history, gross-assets support, business-activity information, conversion and reorganization documents, and repurchase records.
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