Qualified Small Business Stock (QSBS) — IRC § 1202

Qualified Small Business Stock (QSBS) under [IRC § 1202](https://www.law.cornell.edu/uscode/text/26/1202) excludes from gross income up to the greater of **$10M or 10× basis** of gain on sale of qualifying C-corp stock held at least 5 years. The exclusion is also free from the 3.8% Net Investment Income Tax (NIIT). A founder with $10M of QSBS gain potentially saves ~$2.38M in federal tax alone.

**OBBBA (One Big Beautiful Bill Act) 2025 changes.** Public Law 119-21 (signed July 2025) expanded § 1202 for stock issued after July 4, 2025: the per-issuer cap rises from $10M to $15M (indexed); the aggregate-gross-assets test rises from $50M to $75M (indexed); and the statute adds tiered exclusions for shorter holds — 50% at 3 years, 75% at 4 years, 100% at 5 years. Verify current IRS guidance before relying on OBBBA-era specifics.

**The four hard requirements:**

1. **Domestic C-corporation** at issuance and substantially throughout the holding period. S-corp stock is NEVER QSBS. Most LLCs are not QSBS unless converted to C-corp; the QSBS clock starts at conversion. 2. **Aggregate gross assets ≤ $50M** (pre-OBBBA) / **$75M** (post-OBBBA) at all times before and immediately after issuance. Asset test uses basis, not fair-market value; cash raised in a round counts. 3. **Active qualified trade or business.** § 1202(e)(3) EXCLUDES health, law, engineering, architecture, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, farming, mining, hospitality. Tech / SaaS / manufacturing / consumer products are fine. 4. **Original issuance** — acquired from the corporation for cash, property (not stock), or services. Secondary-market purchases are NOT QSBS.

**Holding-period mechanics.** 5-year clock starts at issuance. For ISOs and NSOs, clock starts at *exercise*, not grant. RSUs are a grey area — most advisors treat RSU-settled stock as non-QSBS. SAFE-note conversion: clock starts at the conversion to preferred/common, not at SAFE signing. Early-exercise ISO + § 83(b) election is the fastest path to starting the clock.

**§ 1045 rollover.** Sell QSBS before 5 years? Reinvest in replacement QSBS within 60 days under § 1045 and preserve the holding period. Common use: early liquidity event + later re-investment.

**Stacking strategies.** The per-taxpayer cap can multiply: - **Spousal stacking** — married filing jointly = $20M combined cap (each gets their own). - **Non-grantor trust stacking** — gift QSBS to a Delaware / Nevada non-grantor trust 12+ months pre-exit; each trust is a separate taxpayer with its own cap. Common pattern: 3-5 trusts stacked for $30-50M excluded. - **Family gifting** — each recipient inherits holding period and basis per § 1202(h), gets their own cap.

**Redemption anti-abuse.** Corporate buyback of stock from the holder within 1 year before / after issuance, OR from any person within 2 years (§ 1202(c)(3)), can retroactively disqualify QSBS. Any pre-IPO secondary/tender programs need QSBS-attorney review.

**Exit scenarios.** - **All-cash acquisition** — cleanest; gain excluded up to cap. - **Stock-for-stock § 368 reorganization** — holding period and QSBS character TACK to the new stock per § 1202(h)(4) if the new stock qualifies. - **Asset sale** — worst outcome; often unfavorable structuring.

**State conformity.** VA, WV, and AL conform to federal § 1202 via rolling IRC conformity. CA decoupled 2013 (Cutler v. FTB) with partial reinstatement. NJ and PA do NOT conform — full gain is state-taxed.

Tagged 🟡 because **structural moves** (incorporate as C-corp; early-exercise ISOs; monitor gross-assets cap) are DIY-aware, but **the exit itself is attorney-required**: any founder anticipating a $500k+ QSBS gain should engage a QSBS-experienced tax attorney and CPA 12-18 months before exit. See /learn/guides/qsbs-section-1202 for the full treatment.