Qualified Small Business Stock (QSBS): 2026 Tax Exclusion Guide

What QSBS is — and what makes it extraordinary

Qualified Small Business Stock (QSBS) is stock in a domestic C-corporation that meets the requirements of IRC §1202. When you sell QSBS that you've held for the required period, the gain is excluded from federal income tax — not deferred, not reduced, eliminated entirely up to the statutory cap.

For a founder who built a $5M, $10M, or $15M business, the federal tax savings can be $1.2M to $3.6M or more. No other provision of the tax code comes close to this dollar magnitude for business owners at the $2M–$20M wealth level.

Two sets of rules: pre-OBBBA vs. post-OBBBA stock

The OBBBA changed §1202 significantly, effective July 4, 2025. Which rules apply depends entirely on when the stock was originally issued — not when you sell.

Pre-OBBBA stock (issued before July 4, 2025)

Stock issued before July 4, 2025 follows the rules in place when that stock was issued:¹

• Holding period: 5 years minimum for any exclusion benefit
• Exclusion rate: 100% exclusion for stock acquired after September 27, 2010 (the Tax Relief Act of 2010 made 100% exclusion permanent)
• Exclusion cap: Greater of $10 million or 10× your adjusted basis in that issuer's stock, per taxpayer per issuer
• Gross asset threshold at issuance: The corporation must have had aggregate gross assets under $50 million
• AMT: No AMT preference item for stock acquired after September 27, 2010 — the full excluded gain is also excluded from the AMT calculation

Post-OBBBA stock (issued on or after July 4, 2025)

Stock issued on or after July 4, 2025 benefits from the enhanced OBBBA rules:²

• Tiered holding period: Partial exclusions available before the 5-year mark
  • 3-year hold: 50% exclusion — non-excluded portion taxed at 28% (not standard LTCG rates)³
  • 4-year hold: 75% exclusion — non-excluded portion taxed at 28%
  • 5-year hold: 100% exclusion — zero federal tax up to the cap
• Exclusion cap: Greater of $15 million or 10× adjusted basis per taxpayer per issuer (inflation-adjusted annually starting 2027)²
• Gross asset threshold at issuance: Raised to $75 million (inflation-adjusted starting 2027)
• AMT: No AMT preference item for tiered exclusions under the OBBBA rules — OBBBA amended §57(a)(7) to confirm this

Eligibility requirements — the full checklist

QSBS status requires meeting several conditions simultaneously. Each is a hard requirement:¹

Corporate requirements

• C-corporation only: The issuing entity must be a domestic C-corp. S-corps, LLCs, partnerships, and LLPs do not qualify — even if they elect to be taxed as C-corps. The entity must have been a C-corp at the time of issuance.
• Gross asset threshold: Aggregate gross assets (cash + FMV of other assets) must be at or below $50M (pre-OBBBA) or $75M (post-OBBBA) at the time of issuance and immediately after. Once a company exceeds the threshold, stock issued after that point is disqualified — but previously issued QSBS retains its status.
• Active business test: At least 80% of corporate assets (by value) must be used in a "qualified trade or business" during substantially all of the taxpayer's holding period. Passive assets — cash awaiting deployment, investment portfolios — count against this 80% threshold.
• Disqualified businesses (§1202(e)(3)): Even if all other requirements are met, stock in these industries does not qualify: health, law, engineering, architecture, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage, banking, insurance, financing, leasing, investing, and farming. Software, technology, retail, manufacturing, and most other industries do qualify.

Shareholder requirements

• Original issuance: You must have acquired the stock directly from the corporation — not on a secondary market or from another shareholder. Founders, employees receiving stock grants, and early investors who participated in initial rounds typically meet this. Secondary-market purchases do not qualify.
• Non-corporate taxpayer: The §1202 exclusion is available to individuals, trusts, and estates — not C-corporations. If your corporation holds QSBS in another company, those shares don't qualify for the exclusion at the corporate level.
• Consideration paid: The stock must have been received in exchange for money, property (other than stock), or services. Stock splits and stock dividends on qualifying stock retain QSBS status.
• Holding period: 5 years (pre-OBBBA stock) or 3/4/5 years (post-OBBBA stock) measured from the original acquisition date.

The $15M cap — per taxpayer, per issuer

The exclusion cap applies per taxpayer, per issuer. This creates meaningful planning opportunities:

• Married couples: Each spouse has their own $15M cap. If both spouses hold QSBS (e.g., both are co-founders who received shares in their own names), the combined exclusion is up to $30M from a single company.
• Children and trusts: QSBS can be transferred by gift while retaining its status — the recipient takes your holding-period tack-on and your adjusted basis, but gets their own separate $15M exclusion cap. Transferring QSBS shares to your children (or into a trust for their benefit) before a sale multiplies the exclusion available across the family unit.
• Multiple issuers: The $15M cap applies per issuer. If you have QSBS in three separate companies and each generates $10M in gain, you can potentially exclude all $30M — $10M per issuer, each within the cap.

What QSBS doesn't cover — the traps

State income taxes

Several large states do not conform to the federal §1202 exclusion. Even if your federal gain is fully excluded, you may owe significant state income tax:

• California: No conformity to §1202. All gain is taxed at California's ordinary income rate (up to 13.3%). On a $10M QSBS gain, that's up to $1.33M owed to California even though the federal bill is $0.⁴
• Pennsylvania: No conformity. Gain taxed at 3.07%.
• New Jersey: Does not follow the full exclusion. Gain is partially taxed.
• New York: Limited conformity — New York residents owe state tax on excluded QSBS gain.
• Most other states: Conform fully to §1202. Residents of Texas, Florida, Washington, Nevada, and other no-income-tax states owe nothing at state level either.

If you're a California founder, relocating to a conforming state before the sale — and properly establishing domicile — can save over 13% of your total gain. The timing and steps required are exact; see our state income tax relocation guide.

IRAs and retirement accounts cannot hold QSBS

Stock held inside an IRA does not qualify for the §1202 exclusion. Only stock held in a taxable brokerage account or trust by a non-corporate taxpayer is eligible. If you exercised stock options and put the shares into an IRA, those shares lost QSBS status.

The 28% rate on partially excluded gain

Under the OBBBA tiered rules (3-year and 4-year holds), the non-excluded portion is taxed at 28% — not the normal 15% or 20% LTCG rates. This means partial QSBS with a 3-year or 4-year hold may produce a higher blended tax rate than simply selling and paying 23.8% on everything if your exclusion is small relative to the total gain.

NIIT on non-excluded gain

The 3.8% Net Investment Income Tax applies to the portion of QSBS gain that is not excluded under §1202. For a high-income household, the non-excluded portion faces both the 28% regular tax and the 3.8% NIIT, for a combined rate of 31.8%.³

The §1045 rollover: exit before 5 years without losing QSBS benefits

If you need to sell QSBS before the 5-year holding period is complete — and you hold pre-OBBBA stock with no partial exclusion available — IRC §1045 provides a way to preserve QSBS treatment:

• You sell QSBS that you've held for more than 6 months but less than 5 years.
• Within 60 days of the sale, you reinvest the proceeds into new QSBS in a different qualifying C-corporation.
• The gain is deferred; your holding period tacks onto the new QSBS.
• The new QSBS must independently satisfy all §1202 requirements at the time of purchase.

§1045 is a narrow escape hatch, not a planning strategy — the 60-day window is tight and finding qualifying replacement QSBS is difficult. But if you're facing a liquidity event before the 5-year mark, it's worth knowing this option exists.

QSBS and estate planning — the stepped-up basis conflict

QSBS creates an unusual tension with estate planning:

• If you sell QSBS during your lifetime: You exclude up to $15M of gain federally — potentially a multi-million-dollar tax benefit.
• If you hold QSBS until death: Your heirs inherit the shares with a stepped-up basis under IRC §1014. If they sell immediately, there's no capital gain to exclude. The §1202 exclusion becomes irrelevant.

For most wealthy founders, QSBS is worth more sold in your lifetime than at death — especially if the company hasn't exited yet and a liquidity event is planned. The estate planning strategy shifts toward other tools (trusts, annual exclusion gifts, GRATs) to transfer the wealth efficiently after the QSBS gain is excluded. See our GRAT and trust strategies guide for how these coordinate.

QSBS tax savings calculator

Enter your gain, holding period, and stock issue date to see estimated federal tax savings from §1202 exclusion. Assumes MFJ, 2026 rates.

Pre-sale planning checklist

QSBS planning must happen well before the exit. Most of these items can't be fixed after a term sheet is signed:

• Verify the corporation's asset size at issuance: If gross assets exceeded $50M (pre-OBBBA) or $75M (post-OBBBA) at the time your shares were issued, your stock isn't QSBS. Review the cap table history and financing records.
• Confirm original issuance: Verify you acquired your shares directly from the corporation, not a secondary transfer. 83(b) election records and stock purchase agreements are key documents.
• Confirm the business qualifies: If your company provides services in a §1202(e)(3) excluded category, run this by a tax attorney. "Consulting" and "financial services" are broadly interpreted; many SaaS and tech companies that provide advisory tools or data have navigated this successfully.
• Check the 80% active asset test: If the company holds substantial cash or passive investments, verify that the ratio stays below the threshold throughout your holding period.
• Consider gifting shares to family members: Each recipient gets their own exclusion cap, tacking your holding period. If the sale is 12+ months away, this can meaningfully increase the total exclusion available across your family unit. Coordinate with an estate attorney.
• Model state tax exposure: If you live in California or another non-conforming state, quantify the state-level cost. In some cases, an earlier state domicile change makes financial sense.
• Coordinate with your estate plan: QSBS sold during your lifetime is far more valuable than QSBS held until death (where heirs get stepped-up basis but no exclusion). Make sure your estate planning assumptions account for the planned exit date.

Sources

1. IRC §1202 — Partial Exclusion for Gain from Certain Small Business Stock. Cornell Law School / Legal Information Institute. Pre-OBBBA rules: $10M cap, $50M gross asset threshold, 5-year holding period, 100% exclusion for post-9/27/2010 stock.
2. Baker Tilly — Changes to Section 1202 QSBS in the One Big Beautiful Bill Act. Post-OBBBA (effective July 4, 2025): $15M cap (inflation-adjusted after 2026), $75M gross asset threshold, tiered 50%/75%/100% exclusion at 3/4/5-year hold.
3. The Tax Adviser — QSBS Gets a Makeover (Nov 2025). 28% rate on non-excluded QSBS gain per IRC §1(h)(4); NIIT application to non-excluded portion; AMT treatment under OBBBA amendments to §57(a)(7).
4. Tax Foundation — Qualified Small Business Stock (QSBS) Exclusion. California non-conformity; state-level tax analysis on QSBS gain.
5. Perkins Coie — Significant Changes by the OBBBA to Section 1202. Detailed OBBBA analysis including per-taxpayer cap mechanics, stacking strategies, and holding-period transition rules.

QSBS values verified against IRC §1202, OBBBA (enacted July 4, 2025), and multiple practitioner sources as of July 2026. Tax law changes frequently; verify current thresholds with a tax advisor before relying on specific numbers.