Qualified Small Business Stock (QSBS) is a US tax provision under Section 1202 that lets founders, early employees, and early investors exclude up to $15 million of capital gain per company from federal tax when they sell shares in a qualifying startup.
In plain terms
It is the single largest tax break available to people who get rich from a startup, and most people outside that world have never heard of it. If your shares qualify and you hold them long enough, a large slice of your gain simply is not taxed at the federal level. It is why a founder and a public-company executive can realize the same dollar gain and owe very different amounts.
How it works
The stock must be issued directly by a domestic C corporation — not an LLC, not a partnership, and not bought from another shareholder on the secondary market. The company must have had no more than a set amount of gross assets at the time the stock was issued, and must use at least 80% of its assets in an active qualifying business. Several sectors are carved out entirely, including professional services, financial services, hospitality, and farming.
The One Big Beautiful Bill Act, signed 4 July 2025, rewrote three of the key parameters. Crucially, the new terms apply only to stock acquired after 4 July 2025 — older shares stay under the old rules, so in practice two regimes now run side by side.
The numbers
For stock acquired after 4 July 2025:
| Holding period | Gain excluded |
|---|---|
| Under 3 years | none |
| 3 years | 50% |
| 4 years | 75% |
| 5 years or more | 100% |
- Per-company exclusion cap: $15 million, up from $10 million, indexed for inflation after 2026.
- Company gross-asset ceiling at issuance: $75 million, up from $50 million.
- Effective federal rate on the partially excluded tiers: 15.9% at the 50% tier and 7.95% at the 75% tier, reflecting a 28% rate on the included portion plus the 3.8% net investment income tax.
For stock acquired on or before 4 July 2025: the older regime — $10 million cap, $50 million asset ceiling, a flat five-year holding period, and no partial credit for holding four years.
What people get wrong
That it is automatic. QSBS is a documentation problem as much as a tax provision: the company must have been a C corporation at issuance, the asset test is measured at the moment the stock is issued rather than at sale, and the burden of proving all of it years later sits with the shareholder. Founders routinely discover at exit that a routine early restructuring, a conversion from an LLC, or a secondary purchase disqualified shares they assumed were covered. The second misconception is that the cap is per person — it is per person per company, which is why serial founders can use it repeatedly and why gifting shares to non-grantor trusts, each with its own cap, is a standard planning move.
Related
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See also: 83(b) election · Liquidity event · Tender offer