QSBS Guide 2025

Qualified Small Business Stock (QSBS)

The "Holy Grail" of tax planning: Section 1202 allows for 100% tax-free gains on startup stock. Updated for the 2025 OBBBA reforms.

Executive Summary

Internal Revenue Code Section 1202 offers a massive incentive for investing in small businesses: a 100% exclusion of federal capital gains tax (and usually NIIT/AMT) on the sale of eligible stock held for more than 5 years.

In July 2025, the "One Big Beautiful Bill Act" (OBBBA) modernized this regime. It raised the asset eligibility cap to $75 million and introduced "tiered" exclusions for exits between 3 and 5 years, making the benefit more accessible than ever.

The Benefit

100% Tax-Free: Gain up to $10M (or 10x Basis) is federal tax-free. No 20% capital gains tax, no 3.8% NIIT.

The 2025 Shift

OBBBA Updates: Asset Cap raised to $75M. New exclusion tiers: 50% at 3 yrs, 75% at 4 yrs.

The Trap

Redemptions: Buying back stock from any shareholder can poison the QSBS status of the entire round.

Corporate Eligibility Checklist

C Corp Only

The issuer MUST be a Domestic C Corporation. S Corps, LLCs, and Partnerships are ineligible. Converting an LLC to C Corp starts the clock on the date of conversion.
  • 1

    Original Issuance

    You must acquire the stock directly from the company (for cash, property, or services). Buying from another shareholder (Secondary Market) disqualifies it.

  • 2

    Gross Assets Test

    At all times before and immediately after issuance, the corp's gross assets (cash + tax basis of property) must not exceed:
    $50M (Legacy) or $75M (Modernized post-July 4, 2025).

  • 3

    Qualified Trade or Business (QTOB)

    80% of assets must be used in an active trade.
    Excluded: Health, Law, Accounting, Consulting, Financial Services, Hospitality.

The OBBBA Effect (July 2025)

Stock issued after July 4, 2025 falls under the "Modernized Regime."
Feature Legacy (Pre-July 2025) Modernized (Post-July 2025)
Gross Asset Cap $50 Million $75 Million
Exclusion Cap (Static) $10 Million $15 Million
Holding Period 5-Year "Cliff" (0% or 100%)
  • 3-4 Yrs: 50%
  • 4-5 Yrs: 75%
  • 5+ Yrs: 100%

Advanced Strategy: Stacking

Multiply the Cap

The exclusion cap is Per Taxpayer. By gifting stock to children or Non-Grantor Trusts (NGTs), you can multiply the $10M/$15M exclusion.

Example: Founder + 3 Trusts = 4 x $10M = $40M Exclusion.

Section 1045 Rollover

Sold too early (before 3 or 5 years)? You have 60 Days to roll proceeds into a new QSBS company to defer the gain and keep the clock running.

Requirement: Must hold original stock >6 months.

Interactive: Exclusion Calculator

Calculate your eligible exclusion based on the Greater of $10M/$15M or 10x Basis rule.

Stock Details

Investment Amount or FMV at contribution.

Exclusion Analysis

Static Cap $10,000,000
10x Basis Cap $20,000,000
Applied Cap (Greater) $20,000,000
Total Gain
$0
Tax-Free Amount
Excluded under Sec 1202
$0
Taxable Excess
$0