Tax

Section 1202 QSBS: Up to $10M Gain Tax-Free

Qualified Small Business Stock can exclude up to $10M (or 10× basis) of gain from federal tax. Here's eligibility, holding requirements, and OBBBA's 2025 tiered rules.

By Aparna Devalla, CPA3 min · 5 slidesUpdated June 15, 2026

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What QSBS Does

Section 1202 lets shareholders exclude federal capital gains tax on qualifying small business stock — up to $10M, or 10× the original basis, whichever is greater.
Both founders and early employees can qualify.
Federal tax savings on a $10M gain: typically $1.5M–$2.4M (depending on bracket and surtax exposure).
Some states (notably California) don't conform — state tax still applies even when federal is excluded.

Five Requirements for QSBS

1. Stock must be issued by a domestic C-corporation.
2. Issued after August 10, 1993.
3. Acquired at original issuance (or through gift / inheritance from someone who did).
4. The corporation's gross assets at issuance must not exceed $50M.
5. The corporation must be engaged in a qualified trade or business — broadly, anything other than the excluded categories (banking, insurance, farming, mining, professional services, restaurants/hotels).

Five-Year Holding Period

Stock must be held for more than 5 years to qualify for the full exclusion under §1202.
Section 1045 lets you roll proceeds from QSBS sold before 5 years into new QSBS, deferring the gain while preserving the qualification.
Holding period counts from the original issuance — not from when the recipient acquired (for gifts/inheritance).
Trap: secondary purchases of QSBS in the open market typically don't qualify (must be original issuance).

Common Issues

Failing the original-issuance requirement: stock acquired through secondary purchase doesn't qualify.
Gross assets > $50M at issuance — disqualifies that issuance entirely.
Qualified trade or business test — most service businesses don't qualify; many SaaS, biotech, manufacturing, fintech do.
California and other non-conforming states still tax — federal exclusion alone doesn't eliminate state tax.
Need help confirming QSBS qualification and planning the gain event? Rubric Financial coordinates §1202 qualification analysis and planning with corporate tax filings.

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