Yes, your startup can qualify if it is a small domestic C corporation, issues stock directly to you, and operates an active qualified business. Qualified Small Business Stock (QSBS) is stock in such a company that can qualify for a federal tax exclusion on sale. Noncorporate taxpayers include individuals, trusts, estates and pass-through owners.
They can exclude gain under Section 1202 after holding the shares more than five years, according to the Legal Information Institute the text of Section 1202. Stock acquired after Sept. 27, 2010 can receive a 100% federal exclusion.
Table of Contents
- Is your corporation the right kind?
- How big can the company be?
- Did you get the shares the right way?
- Does the business stay active enough?
- How much gain can you keep?
Is your corporation the right kind?
The issuer must be a domestic C corporation at issuance. Stock issued by S corporations, partnerships or LLCs does not qualify.
Most tech, manufacturing and retail startups can qualify, according to Carta Carta's QSBS tax guide. Check formation documents before you assume you qualify. Confirm tax status on the exact issuance date with counsel.
- United States C corporation at issuance
- S corporation, partnership or LLC does not qualify
- Confirm status on the issuance date
How big can the company be?
The corporation must pass a gross-asset test before and immediately after issuance. For stock issued through July 4, 2025, the limit is $50 million, according to the Tax Foundation Tax Foundation analysis of the QSBS exclusion.
For stock issued after July 4, 2025, the limit rises to $75 million, according to the Tax Foundation. That higher limit is indexed for inflation after 2026.
Did you get the shares the right way?
You must acquire the stock at original issuance directly from the corporation or an underwriter, according to Carta. Payment can be money, property or services.
Secondary purchases do not qualify. Stock options are not QSBS until exercised. The holding clock starts at exercise, according to Carta.
Does the business stay active enough?
The company must use at least 80% of assets in an active qualified business, according to Carta. This test must hold during substantially all your holding period.
Health, law, accounting, consulting and financial services do not qualify. Hospitality, farming, banking and extractive businesses also do not qualify.
How much gain can you keep?
For stock issued before July 5, 2025, the federal cap per issuer is $10 million or 10 times basis, according to Wiggam Law. You use whichever amount is greater. For stock issued after July 4, 2025, the cap rises to $15 million or 10 times basis. You again use the greater amount.
The exclusion is tiered: 50% after three years, 75% after four years and 100% after five years, according to Wiggam Law. California and several other states tax QSBS gains despite the federal exclusion, according to Summitry. Verify your state treatment and keep issuance and active-business documentation. Section 1045 allows a rollover if you held the stock over six months and reinvest within 60 days. Reinvest the proceeds within 60 days to preserve the benefit.