QSBS: Exclude Up to $15M in Startup Stock Gains

What is QSBS (Section 1202)?

Qualified Small Business Stock (QSBS) is stock in a qualifying C-Corporation that, under Section 1202 of the Internal Revenue Code, can exclude a large share of your capital gain from federal income tax. Stock acquired on or before July 4, 2025 excludes up to the greater of $10M or 10x your adjusted basis after a five-year hold. Stock acquired after that date, under the One Big Beautiful Bill Act, follows a tiered schedule capped at $15M, with partial exclusions starting at year three and the full 100% exclusion at year five.

For founders and early employees at venture-backed startups, QSBS is one of the largest tax breaks available in the code, but it isn't automatic. Eligibility depends on tests the issuing company had to meet at the moment the stock was issued, not at the time of sale. If those tests weren't met, or weren't documented, the exclusion is gone with no way to recover it after the fact, which is why a QSBS tax strategy has to start well before a sale, not after a term sheet arrives. The Equity Architect builds that documentation trail early, while it can still be fixed.

→ See how the EQUITY System™ integrates QSBS planning

Qualifying requirements

Not all startup stock qualifies. The issuing corporation and the stock itself both have to meet a specific set of tests at issuance:

These tests are evaluated at issuance. A company that grows past $50M in gross assets after the stock is issued doesn't retroactively disqualify shares issued earlier, but a company that already exceeded the threshold at issuance disqualifies the stock from the start.

The five-year holding period

The Section 1202 exclusion only applies to QSBS held for more than five years, with the clock starting on the stock's acquisition date, not the company's founding date or your vesting start date. Selling QSBS before the five-year mark forfeits the exclusion entirely for that sale.

If a liquidity event forces a sale before the five-year mark, a Section 1045 rollover (reinvesting the proceeds into new QSBS within 60 days) can preserve the original holding period and carry the exclusion forward into the replacement stock. This requires coordination before the sale closes, not after.

Because the holding period is measured in years, not milestones, it's worth mapping against your company's expected exit timeline early: a nine-month gap between an acquisition offer and your five-year mark can be the difference between a fully excluded gain and a fully taxed one.

How much you can exclude

For QSBS acquired on or before July 4, 2025 and held more than five years, Section 1202 excludes the greater of $10M or 10x your adjusted basis in the stock from federal capital gains tax, per taxpayer, per issuing corporation. Stock acquired after July 4, 2025, under the One Big Beautiful Bill Act, raises the flat cap to $15M (indexed for inflation after 2026) and adds a tiered schedule: partial exclusions at years three and four, and the full 100% exclusion at year five. Gain above the cap is taxed at standard long-term capital gains rates.

Stacking the exclusion

The Section 1202 exclusion is per-taxpayer and per-issuer, not per-company. With proper planning, multiple taxpayers can each claim up to $10M (or 10x basis) of exclusion on stock from the same issuing company, a strategy known as QSBS stacking.

The most common stacking structures use gifting or trusts: gifting shares to a spouse, children, or an irrevocable trust before a sale transfers a portion of the exclusion to the recipient, since each is treated as a separate taxpayer for Section 1202 purposes. Because gifts and trust transfers carry their own tax and legal requirements, this stacking has to be modeled and documented with legal counsel before any transfer, not at the closing table.

QSBS vs. other exit tax strategies

QSBS is often confused with the capital gains treatment available on a qualifying ISO disposition, but the two are separate provisions that can apply to the same shares. A qualifying ISO disposition gets you standard long-term capital gains treatment on the spread; Section 1202 can exclude some or all of that same gain from federal tax entirely, provided the underlying shares (whether founder stock or shares acquired through an early ISO exercise) independently meet the QSBS issuance and holding-period tests.

In practice, this means an employee who early-exercises ISOs into common stock at a low 409A valuation, before the company's gross assets approach $50M, may hold shares that qualify for both a qualifying ISO disposition and the QSBS exclusion, compounding the tax benefit. The tests run independently, so confirming one doesn't confirm the other.