Understanding Qualified Small Business Stock
QSBS – Section 1202
Qualified Small Business Stock (QSBS) is one of the most advantageous provisions in the tax code.
It refers to stock issued by a qualified small business that meets specific criteria outlined in section 1202 of the Internal Revenue Code. Investors who hold QSBS for more than 5 years may be able to exclude from gross income up from 100% of any capital gain realized on the sale of QSBS. The rules became more generous for stock issued after July 4, 2025, and the changes are summarized below.
What is IRC Section 1202?
Section 1202 provides the full or partial exclusion of capital gain realized on the sale of qualified small business stock (QSBS) that is held for more than 5 years. There are requirements that apply to the Company that issued the QSBS, and requirements that apply to the shareholder that is selling the QSBS. If these requirements are met, then the selling shareholder can exclude from gross income capital gain in an amount equal to the greater of (i) $10 million, or (ii) an annual exclusion of 10 times their basis in the stock sold (for an exclusion amount up to $500 million). There are also specific tax strategies, like stacking and packing, that enable selling shareholders to magnify the tax benefits.
The exact exclusion percentage depends on the date when the selling shareholder acquired the QSBS from the Company, rather than the date on which the QSBS is sold. The percentages range from 50% to 100%, with the latter applicable to QSBS acquired after September 27, 2010.
For stock issued after July 4, 2025, there are three important changes to the QSBS rules: (i) the new regime allows for a 50% exclusion after three years, a 75% exclusion after four years and a 100% exclusion after five years, (ii) the cumulative per-issuer gain limit is increased from $10 million to $15 million, indexed for inflation beginning in 2027, and (iii) the limitation ceiling on a corporation’s “aggregate gross assets” is increased from $50 million to $75 million, indexed for inflation beginning in 2027.
“Qualified small business stock is one of the most generous gain exclusions in the entire Internal Revenue Code (IRC). We routinely enable clients to exclude $10 million or more of capital gain on the sale of their businesses.”
Daniel Mayo, JD, LLM, Partner
Lead, National Tax Services
What Are The QSBS Requirements?
There are requirements that apply to the Company that issued the stock, and requirements that apply to the…
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