Qualified Small Business Stock (QSBS), under IRC Section 1202, is one of the most valuable breaks in the code: done right, it can let founders, early employees, and seed investors exclude a large share of gain when they sell stock in a C corporation. The One Big Beautiful Bill Act made the rules noticeably more generous, and the split between "new" stock and "old" stock is where most of the planning actually lives. (Bessemer Trust)
Who qualifies
QSBS is not automatic — the stock has to meet every one of these tests at the time of issuance, not when you sell: (Bessemer Trust)
- It must be stock in a domestic C corporation (not an S corp, partnership, or an LLC taxed as a partnership).
- It must be original-issue stock you acquired for money or property, or you received it in exchange for services (stock-for-services, i.e. the founder/employee path).
- At the moment of issuance the company's gross assets must be below the threshold — under OBBBA that is $75 million, up from $50 million.
- At least 80% of the company's assets have to be used in a qualified trade or business, and the company has to be operating (not a holding company, and not just sitting on cash).
Excluded industries are the ones Congress judged "professional services" rather than active business: law, accounting, health services, consulting, finance, insurance, banking, and a handful of others. A law firm's stock does not qualify no matter how early you bought in. (Bessemer Trust)
The OBBBA changes (stock issued after July 4, 2025)
This is the version most founders are living under now:
- The per-issuer exclusion cap is raised to the greater of $15,000,000 or 10x your basis in the stock (up from $10 million), and it is inflation-indexed starting in 2027.
- The gross-asset threshold at issuance is raised to $75 million (up from $50 million).
- The holding period is graduated: 50% of gain excluded at three years, 75% at four years, 100% at five years.
- The excluded gain is not subject to the 3.8% NIIT, which matters more than people think when the investor is a high earner.
Stock issued on or before July 4, 2025 keeps the old rules: a flat five-year hold for 100%, and the $10 million cap. The date of issue is what locks a share into one regime or the other, so in a company that has raised rounds on both sides of that line, the "new" and "old" shares are treated differently on the same exit. (Bessemer Trust)
A trap that surprises people: the partial-exclusion tax rate
This is the one that gets missed. For post-OBBBA stock sold at three or four years — when only 50% or 75% is excluded — the unexcluded portion of gain is not taxed at the normal long-term capital-gains rate of 15% or 20%. It is taxed at 28%, the flat rate Congress set for QSBS in that band. So a three-year exit does not just give up half the exclusion; the half you lose is taxed at a higher rate than a normal long-term gain would have been. Model the effective rate before deciding to sell early, because the gap between a 50% partial exclusion and a 100% five-year exclusion is far bigger than the percentage suggests. (Bessemer Trust)
The cap is per person, per company
The $15 million limit is per taxpayer, per issuer. That means a married couple who each hold QSBS in the same company each carry their own $15 million cap, which can effectively double the exclusion on a single exit. The same is true across different companies — your cap in Company A is separate from your cap in Company B. The basis-multiplier ("or 10x basis") also means that in a company you bought at a real cost, your ceiling can be well above $15 million, which matters for a seed investor whose basis is not near zero. (Anomaly CPA)
Numbers: a founder's exit, two ways out
A founder holds post-OBBBA QSBS and sells for a $15,000,000 gain:
- Hold for five years: 100% exclusion, so federal capital-gains tax on that gain is $0, and no NIIT. The entire gain walks away.
- Sell at three years instead: only 50% is excluded, so the other $7.5 million is taxed at 28%, which is roughly $2.1 million of tax on the same exit.
That $2.1 million difference is why the holding period is the whole game. When an exit is forced earlier than you would like — a secondary sale, a liquidity event you cannot defer — the 28% partial-exclusion rate and the loss of the full exclusion are the two costs to carry into the deal. (Anomaly CPA)
If you are deciding between a sale, a rollover, or an option exercise, run the numbers in the capital gains calculator first; it will show you the long-term rate against the QSBS bands so the decision is made on the actual tax, not on a feel. (Internal Revenue Service)
Disclaimer: This article is general educational information, not tax, legal, or investment advice. Dollar amounts come from the 2026 sources listed at the end of this article and may change. Before you act, talk to a licensed CPA, EA, or tax attorney about your own situation.