What Qualified Small Business Stock is, the eligibility rules, the 5-year holding period, and how founders and early employees can exclude up to $10M.
QSBS is one of the most valuable tax provisions in the US tax code for founders and early employees. Meet the requirements and you can exclude up to $10M in gains from federal capital gains tax at exit.
Qualified Small Business Stock, defined by IRC Section 1202. Stock held for 5+ years in a qualifying C-corp can be sold with up to $10M (or 10× basis, whichever is greater) of gains excluded from federal capital gains tax.
Must be a domestic C-corp. Gross assets under $50M at the time the stock was issued (and immediately after). Active business (not investment, farming, or certain services). Stock must be issued directly by the company (not purchased on a secondary market).
Must hold the stock for 5+ years before selling. Must have acquired it at original issuance from the company. Includes founder stock, exercised options, and stock from priced rounds — but not shares purchased in a tender offer.
Per taxpayer, per company. Excludes federal capital gains tax on the greater of $10M or 10× the taxpayer's basis. A founder with $100K basis can shield up to $10M; a founder with $2M basis can shield up to $20M.
Each family member can claim their own $10M exclusion on the same company's stock. Gifting shares to family members before a liquidity event can multiply the exclusion — coordinate with a CPA well before the exit.
Converting from an LLC or S-corp to C-corp resets the clock. Company crosses $50M gross assets threshold before your stock was issued. Selling before the 5-year holding period. Repurchases by the company within 2 years can taint the shares.
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