QSBS is a federal tax provision, IRC Section 1202, that lets founders and early investors exclude some or all of their capital gain from taxes when they sell qualifying stock in a C-corporation, as long as it's been held long enough.
Eligibility is structural, not something fixed after the fact. The company generally has to be a domestic C-corp with gross assets under a set threshold at the time the stock was issued, and the stock has to come directly from the company, not be bought from another shareholder. The holding-period tiers and gain-exclusion caps depend on when the stock was issued, since federal rules changed for stock issued after July 4, 2025. That's a question for a CPA checking against the actual issuance date, not a single number worth memorizing.
The clock starts the moment stock is issued, at formation or at each later round, and nobody can go back and make earlier stock QSBS-eligible after the fact. Confirming eligibility early, long before an exit makes the number on the table real, is the entire point of tracking it.
Section 1202 lets you exclude gain from federal income tax when you sell qualified small business stock. For stock issued after July 4, 2025, the exclusion is capped per company at the greater of $15 million or 10 times your basis in the stock, with the $15 million indexed to inflation starting in 2027. On a large exit, that can mean millions of dollars of federal tax that's never owed.
The One Big Beautiful Bill Act, signed July 4, 2025, replaced the old all-or-nothing five-year rule with tiers for stock issued after that date:
The part that isn't excluded is taxed at up to 28%, plus the 3.8% net investment income tax for higher earners. That works out to an effective federal rate of about 15.9% on the whole gain at three years and about 7.95% at four.
Stock issued on or before July 4, 2025 keeps the old rules: nothing until five years, then up to 100% excluded (for stock issued after September 27, 2010), capped at the greater of $10 million or 10 times basis.
All of these have to be true. Most are about the company at the moment the stock was issued, which is why they're worth checking early:
The holding period starts when you acquire the stock. For founders with restricted stock that vests, that's the vesting date of each tranche, unless you filed an 83(b) election within 30 days of the grant, which starts the clock at the grant date for all of it. For stock options, it starts when you exercise, not when the option was granted.
That makes the 83(b) election one of the most valuable filings a founder makes for QSBS, and one of the easiest to miss.
Illustrative only. State tax, AMT and your own facts change the numbers; confirm eligibility with a CPA before relying on it.
For stock issued after July 4, 2025, up to the greater of $15 million or 10 times your basis, per company (indexed to inflation from 2027). For stock issued on or before July 4, 2025, the cap is the greater of $10 million or 10 times basis.
For stock issued after July 4, 2025, no: you can exclude 50% after three years and 75% after four, and 100% after five. Stock issued on or before July 4, 2025 still needs five years, and gets nothing before then.
No. Only stock in a domestic C corp qualifies. If an S corp or LLC converts to a C corp, stock issued after the conversion can qualify, but the earlier interests don't.
No. California doesn't conform to Section 1202, so California residents owe state income tax on the full gain even when the federal exclusion applies.
Yes. Without it, each tranche of restricted stock is treated as acquired when it vests, so its holding period starts then. With an 83(b) filed within 30 days of the grant, the clock starts at the grant date for all of it.
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