Tax

QSBS (Section 1202)

Qualified Small Business Stock — gains can be excluded from federal tax, up to the greater of $15M (stock acquired after July 4, 2025) or 10× basis.

If you hold qualifying C-corporation stock long enough, §1202 can exclude a large share of the gain from federal capital-gains tax — a major benefit for founders and early employees. The 2025 tax law (OBBBA) tiered the benefit for stock acquired after July 4, 2025: a 50% exclusion at a 3-year hold, 75% at 4 years, and 100% at 5 years, with the per-issuer cap raised to $15M (inflation-indexed) and a $75M gross-assets test. Stock acquired on or before July 4, 2025 keeps the older regime — a 100% exclusion only after a full 5-year hold, a $10M cap, and a $50M asset test. The rules are strict (issuer eligibility, original issuance, the holding-period clock, per-issuer caps), so tracking the holding period, basis, and acquisition date from the grant is essential — and which regime applies turns on when you acquired the stock.

The exclusion, in plain terms

Qualified Small Business Stock is stock in a domestic C-corporation that met a gross-assets test (generally $50 million or less) when the shares were issued, acquired at original issuance, and held long enough. Meet the rules and a large portion — in many cases up to 100% — of the gain on sale can be excluded from federal tax, capped at the greater of $10 million or 10× your basis per company. It's one of the most valuable breaks in the code for founders and early employees.

Where it's won or lost

QSBS hinges on details that are easy to fumble years before a sale: the company must be a C-corp (not an LLC or S-corp) at issuance, the holding-period clock starts at acquisition, and certain service businesses don't qualify. Some holders multiply the cap by gifting shares to non-grantor trusts so each gets its own exclusion (“QSBS stacking”). The exclusion is only as good as the documentation proving the stock qualified.

How Formation handles it

Formation tracks the acquisition date, basis, and entity type behind each position so the holding-period clock and the per-issuer cap are visible long before a liquidity event — and so the conversation with your tax advisor about stacking or timing starts from real records, not a scramble through old emails.

A worked example

You bought founder stock in a qualifying C-corp for $100,000 and sell years later for $9 million. If the stock is QSBS, the entire $8.9 million gain can fall under the per-company cap (the greater of $10 million or 10× the $100,000 basis), excluding it from federal capital-gains tax. Miss the C-corp requirement at issuance and none of it qualifies.

Frequently asked

Does LLC or S-corp stock qualify for QSBS?

No. The stock must be in a domestic C-corporation at issuance. Companies sometimes convert to a C-corp specifically to start the QSBS clock — the holding period runs from that point.

Can I exclude more than $10 million of gain?

The cap is the greater of $10 million or 10× your basis, per company. Some holders also gift shares to separate non-grantor trusts so each claims its own cap — a planning move to run with your attorney and CPA.

In Formation

Track QSBS holding period & basis

See this in your own numbers.

Formation organizes your whole household by entity and cites every figure to its source — the context that makes terms like this actionable.

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