What QSBS is
Section 1202 of the tax code lets you exclude capital gains on qualified small business stock (QSBS) from federal tax, up to a large cap. For early startup employees who own actual shares, it can be the largest tax break available.
Does your stock qualify?
In general, all of these must be true:
- The company is a US C corporation.
- Its gross assets were $75,000,000 or less when the stock was issued ($50,000,000 for stock issued before July 5, 2025).
- You got the stock directly from the company, for example by exercising options, early exercise, or founder stock. Shares bought from another shareholder don't qualify.
- The company runs an active qualified business. Many service businesses (health, law, consulting, finance and others) are excluded.
RSUs and unexercised options aren't QSBS. The clock starts when you actually own the shares, at exercise or settlement.
Holding period and exclusion
Stock issued after July 4, 2025:
- 3 years → 50% of the gain excluded
- 4 years → 75%
- 5 years → 100%
Stock issued before July 5, 2025: 100% exclusion after 5 years, nothing before.
How much is excluded
Per company, the greater of:
- $15,000,000 of gain for newer stock ($10 million for older stock), or
- 10 times your basis in the shares.
Excluded gain is also free of the 3.8% net investment income tax.
States that don't follow
Some states tax QSBS gains anyway, most notably California and Pennsylvania. Residents of those states still owe state tax on the full gain.
Tips
- Ask the company whether it tracks QSBS eligibility and will give you a statement.
- Early exercise with an 83(b) election starts the QSBS clock sooner.
- The rules are strict. Get professional advice before relying on the exclusion.
General information, not tax advice. The calculator doesn't yet apply the QSBS exclusion.
Frequently asked questions
Can I qualify for QSBS with stock options or RSUs?
No, unexercised options and RSUs are not considered QSBS. The holding period clock only begins once you actually own the shares through exercise or settlement. Therefore, you must hold the underlying stock to potentially benefit from the capital gains exclusion.
Do I need to buy stock directly from the company to get QSBS treatment?
Yes, the stock must be acquired directly from the company to be eligible. Examples of this include receiving founder stock or shares obtained through exercising options. If you purchase your shares from another shareholder rather than the issuing entity, those shares will not qualify for the Section 1202 exclusion.
Does California tax QSBS gains?
Yes, some states do not conform to federal QSBS rules and will tax these gains regardless of federal eligibility. California and Pennsylvania are the most notable examples of states where residents must pay state income tax on the full amount of their capital gains from qualified startup stock.
How long must I hold my QSBS to get a 100% exclusion?
For stock issued before July 5, 2025, you must hold the shares for at least five years to receive a 100% exclusion. For stock issued after July 4, 2025, the holding period for a 100% exclusion is also five years, though shorter holding periods allow for partial exclusions.
Official sources (for the detail-minded)
- IRC Section 1202Excluding gain on qualified small business stock
- IRC Section 1202(d)The company gross-assets limit
- IRC Section 1202(e)The active business requirement
- IRC Section 1045Rolling QSBS gain into new QSBS
- Pub. L. 119-21 (2025)The 2025 law that added tiered exclusions and raised the limits
Run your own numbers
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