Financial Glossary
Qualified Small Business Stock (QSBS)
Qualified small business stock (QSBS) refers to shares of a domestic C-corporation that meet specific criteria under Section 1202 of the Internal Revenue Code, potentially allowing investors and founders to exclude a large share of the capital gain from federal income tax at sale. How long the stock has to be held turns on when it was acquired: stock acquired after July 4, 2025 is on the tiered schedule the OBBBA introduced -- 50% excluded at three years, 75% at four, 100% at five -- while stock acquired on or before that date has to be held more than five years. To qualify, the corporation must be a domestic C-corp engaged in a qualified trade or business (certain industries including financial services, hospitality, and professional services are excluded), and its aggregate gross assets -- cash plus the adjusted bases of its other property -- must stay under the ceiling through issuance, which is $75 million for stock issued after July 4, 2025 and was $50 million before. Shares must be acquired at original issuance in exchange for money, property, or services -- not purchased on the secondary market.
Problem & Application
An angel investor puts $500,000 into a SaaS startup's seed round, acquiring QSBS-eligible shares. Five years later the investor sells for $3,000,000, generating a $2,500,000 gain. Under Section 1202 the cap runs per issuer and per taxpayer at the greater of 10 times the adjusted basis of the stock sold, or a dollar limit of $15 million for stock acquired after July 4, 2025 and $10 million for stock acquired on or before it. Either limit covers the $2,500,000 gain in full -- potentially saving over $500,000 compared to long-term capital gains treatment. Founders who receive QSBS at incorporation can also benefit if their shares qualify. Startups should confirm QSBS eligibility early (industry type, corporate structure, asset ceiling) and document issuances properly, since retroactive correction is often impossible. Note that state tax treatment of QSBS exclusions varies and some states do not conform to the federal exclusion.
In Short
QSBS is one of the largest exclusions in the code for founders and early investors, and which version of it applies to you is fixed by the date the stock was issued. Confirm eligibility then, not at exit, because the corporate tests are measured at issuance and cannot be met retroactively.