Qualified Small Business Stock

Up to 100% federal exclusion of gain on qualifying C-corp stock — and, after the 2025 changes, a new tiered holding-period ladder and higher caps.

What it is

Under §1202, non-corporate taxpayers may exclude eligible gain on the sale of qualified small business stock (QSBS). As amended by Public Law 119-21 (enacted July 2025), stock acquired after enactment can qualify for a 50% exclusion after 3 years, 75% after 4 years, and 100% after 5 years; stock acquired on or before that date generally remains under the older more-than-five-year framework. QSBS is established at issuance and preserved through governance — it is not won at exit.

Where it fits

It is most valuable for founders and early investors who can plan exit timing around the 3/4/5-year ladder, where stock is issued at original issuance by a domestic C-corporation within the gross-asset limit and the business is in a qualified trade.

Eligibility — the threshold questions

• Was the stock issued by a domestic C-corporation? S-corporations do not qualify.
• Was it acquired at original issuance in exchange for money, property, or services?
• Were aggregate gross assets at issuance within the threshold ($50M for pre-enactment stock, raised to $75M after)?
• Did the company meet the active-business test — at least 80% by value of assets used in a qualified trade — during substantially all of the holding period, and avoid an excluded business and disqualifying redemptions?

How it works in practice

The per-issuer cap is $10M for older stock or $15M for post-enactment stock (inflation-adjusted after 2026), or 10 times basis. A §1045 rollover lets a holder defer gain by reinvesting in replacement QSBS within 60 days. Gain can also pass through a partnership or S-corporation if the entity held qualifying stock and the owner held the interest continuously.

Documentation that holds up

• Formation and tax-classification support; original-issuance records and board approvals
• Cap-table history and gross-asset calculations at issuance
• Annual business-activity and asset-use memos; redemption and recapitalization log
• Pass-through continuity records and an exit-readiness memo covering holding period, exclusion percentage, and dollar limit

Edge cases & when another path fits

Entity drift away from C-corporation status, business-model drift into passive or excluded activity, redemptions that taint the stock, weak issuance records, and exit timing without milestone analysis are the core failure modes. Real estate operating companies can qualify only within the active-business and non-passive-real-property limits (no more than 10% of assets in real property not used in the active business).

Frequently asked questions

Does QSBS still require a 5-year hold?

For 100% exclusion, yes — but post-enactment stock now also offers 50% at 3 years and 75% at 4 years.

What is the gross-asset limit now?

$75M for stock issued after the July 2025 enactment ($50M for earlier stock).

What is the per-issuer cap?

$15M for post-enactment stock ($10M for older stock), or 10 times basis.