Qualified Small Business Stock (QSBS)

What it means

Qualified Small Business Stock (QSBS) is a tax benefit for employees who own shares in certain small companies. If you hold these shares long enough, the government allows you to pay less tax on the profit you make when you sell them.

To qualify, the company must be a C corporation with gross assets (the total value of everything the company owns) of $75 million or less at the time the stock was issued. You must also hold the stock for several years before selling it to get the tax break.

A simple example

Imagine Sarah buys company stock for $10,000. This amount is her basis (the original price she paid). After 5 years, the company grows and she sells her stock for $100,000. Her capital gain (the profit she made) is $90,000. Because she held the stock for at least 5 years, she can exclude 100% of that gain from her federal taxes. Instead of paying taxes on $90,000, she pays tax on $0.

Why it matters to you

• It can save you a large amount of money on federal income taxes.
• You must hold the stock for at least 3 years to see any tax benefit.
• You must hold the stock for 5 years to get the biggest tax savings.
• States like California and Pennsylvania do not follow these federal rules, meaning you may still owe state tax on your profit.

Common mistakes to avoid

• Buying shares from another shareholder on the private market (a secondary purchase) generally does not qualify. QSBS only covers stock you got directly from the company, such as by exercising options, RSU delivery, or buying in a funding round.

• Selling your stock too early before reaching the required holding period.

• Assuming your state tax return will follow the same rules as your federal return.

• A tax professional can help you confirm if your specific shares qualify.

Words used on this page

• Basis: The original amount you paid for your stock.
• Capital Gain: The profit you make when you sell your stock for more than you paid.
• C Corporation: A legal business structure that is separate from its owners for tax purposes.
• Gross Assets: The total value of all property and money a company owns.