QSBS Guide: Qualified Small Business Stock Tax Exclusion
A founder’s guide to Qualified Small Business Stock (QSBS) under §1202 — eligibility rules, the five-year holding period, the per-issuer cap, trust stacking strategies, and how to be transaction-ready before a liquidity event.
What is QSBS?
QSBS, or Qualified Small Business Stock, is stock in a U.S. C-corporation that meets the requirements of §1202 of the Internal Revenue Code. Under §1202, eligible shareholders can exclude up to $10 million (or 10× their basis) of federal capital gains per issuer when they sell the stock — sometimes more after trust stacking. The exclusion can save founders millions in federal tax at exit.
Core eligibility rules
- The issuer must be a domestic C-corporation.
- Aggregate gross assets at and immediately after issuance must be $50 million or less.
- The corporation must be in an active qualified trade or business. Finance, farming, hospitality, and certain professional services are excluded.
- The shareholder must hold the stock for more than five years before the sale.
- The stock must be acquired at original issuance.
The five-year holding period
The §1202 clock starts on the date you acquire the stock at original issuance (or, for exercised options, the exercise date). Selling before five years forfeits the exclusion — though §1045 rollovers can preserve the clock by rolling proceeds into new QSBS within 60 days.
Per-issuer cap and trust stacking
The §1202 exclusion is capped per issuer at the greater of $10 million or 10× basis. Trust stacking — gifting QSBS to non-grantor trusts before the five-year mark — can multiply that cap by giving each trust its own $10M exclusion. Trust stacking has to be set up carefully to respect gift tax, step transaction, and assignment of income doctrines.
Transaction readiness checklist
- Confirm C-corporation status and original issuance documentation.
- Verify the $50M aggregate gross assets test at issuance.
- Track the five-year holding clock per grant.
- Decide on trust stacking ahead of any signed term sheet — once a sale is imminent, gifting windows narrow.
- Coordinate with a CPA and estate attorney before exercising or transferring QSBS shares.
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