Tax
QSBS (Qualified Small Business Stock, §1202)
A tax provision excluding up to $15M of capital gain on qualifying small business stock (stock issued after July 4, 2025; $10M for earlier stock). Structured well, one of the most powerful tax breaks in the code for founders and early employees.
Section 1202 excludes capital gain on the sale of qualified small business stock. For stock issued after July 4, 2025 (OBBBA rules): up to $15M or 10× basis, gross assets at issuance under $75M, and a tiered exclusion: 50% at 3+ years, 75% at 4+ years, and 100% at 5+ years.
Stock issued on or before July 4, 2025 keeps the old rules: $10M (or 10× basis) cap, $50M gross-assets ceiling, and an all-or-nothing 100% exclusion at 5+ years (for post-9/27/2010 issuances).
Either way, the issuer must be a domestic C-corp and must conduct an active business in qualified industries (excluding professional services, financial services, hospitality).
The dollar cap is per-taxpayer, per-issuer — a critical planning lever. Spreading QSBS across family trusts, non-grantor trusts (each a separate taxpayer with its own cap), and separate S/N-corp entities creates deliberate 'stacking' that can multiply the total exclusion by 3-10× for a large exit. This has to be architected before the trust receives the shares; a post-facto gift doesn't work.
The §1045 rollover is the fallback when a sale happens before 5 years. Reinvesting proceeds into another QSBS-eligible C-corp within 60 days rolls the gain forward, tacking the old holding period onto the new stock. Useful when a founder's original company gets acquired at year 3 or 4 — the acquirer's stock may itself qualify or the founder may reinvest into a new startup.
Common pitfalls
- Converting an LLC to C-corp doesn't reset the QSBS clock; only stock issued post-conversion qualifies
- For stock issued on or before July 4, 2025, the 5-year holding period is a cliff: even one day short disqualifies, and only post-OBBBA stock gets the 3- and 4-year partial tiers
- Many states (including California) don't conform to §1202, so state tax still applies
- Missing the trust-stacking opportunity before the shares are issued — retroactive gifts don't create new taxpayer caps
- Redemptions from the same shareholder within 2 years before / after issuance disqualify the stock entirely; buybacks and cross-purchase timing must be watched
Related service
See tax and CPA servicesHave a QSBS (Qualified Small Business Stock, §1202) situation in your business?
Federal, state, and local returns prepared and reviewed by a licensed CPA, with the planning done before year-end rather than after it.