QSBS under Section 1202 is the largest exclusion in the code for startup founders and early investors: gain on the sale of qualifying C corporation stock can be excluded from federal tax entirely, historically 100% after a five-year holding period, capped at the greater of $10,000,000 or ten times basis per issuer. The 2025 tax legislation expanded the benefit for newly issued stock: a tiered exclusion beginning at three years, a higher per-issuer cap, and a larger gross asset limit for issuing companies. Core requirements remain: the issuer must be a domestic C corporation with gross assets under the statutory limit at issuance, the stock must be acquired at original issuance (not bought from another shareholder), and the company must run an active qualified business, which excludes most service professions, finance, and real estate. QSBS drives entity choice: founders expecting a large exit often accept C corporation double taxation to buy a shot at a tax-free sale.
Qualified Small Business Stock (QSBS)
Primary authority: IRC §1202
The authority behind it
IRC §1202
Every entry in this glossary cites the statute, regulation, or IRS guidance behind it.
Worked example
A founder receives C corporation stock at incorporation with near-zero basis. Seven years later she sells her stake for $9,000,000. With QSBS qualification, the entire federal gain can be excluded, saving well over $2,000,000 versus regular capital gains treatment.
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