Your company could sell for millions. How much of the gain can you keep?

What is qualified small business stock?

QSBS is stock that satisfies the requirements of Internal Revenue Code Section 1202. The incentive rewards qualifying investment in certain domestic C corporations. Founders, employees who acquire shares, and investors may benefit; being a founder is neither necessary nor sufficient.

The exclusion concerns gain, not the entire sale price. If eligible shares cost $100,000 and sell for $6 million, the starting gain is $5.9 million before other adjustments. Eligibility and the applicable limits determine how much may be excluded.

A sale of corporate assets is not the same transaction as a shareholder's sale of stock. Do not assume a buyer's proposed deal structure produces the same tax result.

First, the company has to qualify

Several requirements apply together:

• Domestic C corporation. Shares in an LLC or S corporation are not themselves QSBS. A qualifying conversion can create a new opportunity, not retroactively qualify the earlier ownership period.
• Gross-asset ceiling at issuance. For stock issued after July 4, 2025, the starting threshold is $75 million; for stock issued on or before that date, it is $50 million. The test looks at the corporation and relevant predecessors before issuance and immediately afterward, including the issuance proceeds. The newer threshold is indexed for taxable years beginning after 2026.
• An eligible active business. During substantially all of the holding period, at least 80% of asset value generally must be used in qualifying active business activities. Special rules address working capital, research, subsidiaries, and passive assets.
• No disqualifying transaction. Certain stock redemptions and other events can undermine qualification.

The asset test is not simply the company's venture valuation or its net worth after subtracting liabilities. Contributed property has special valuation rules.

Excluded businesses include many professional services, financial services, banking and insurance, farming, extraction businesses, and hotels and restaurants. A promising private company is not necessarily a qualified business.

Then, your shares and ownership have to qualify

Section 1202 generally requires original-issue stock acquired for money, qualifying property other than stock, or services. Buying shares from another shareholder ordinarily does not satisfy that requirement. Gifts, transfers at death, and certain other transactions have specific exceptions; they need separate analysis.

The claimant must be a taxpayer other than a corporation. Partnerships and other pass-through entities have additional ownership and allocation conditions, so an investment through a fund is not interchangeable with a direct purchase.

An option grant does not itself start the QSBS stock holding period. Exercise and stock issuance generally matter. Restricted stock, an early exercise, a Section 83(b) election, SAFEs, and convertible notes require instrument-specific review. One company can issue different share lots with different qualification results.

What changed in 2025?

The 2025 legislation created different rules for different vintages of stock. Keep the issuance date and the tax acquisition date, including applicable holding-period tacking, distinct.

For stock acquired after July 4, 2025, the federal exclusion percentage is generally:

• 50% after at least three years but less than four years.
• 75% after at least four years but less than five years.
• 100% after at least five years.

For otherwise eligible stock acquired after September 27, 2010, and on or before July 4, 2025, the general rule remains a 100% exclusion after more than five years. Earlier acquisitions can have 50% or 75% exclusions and different alternative-minimum-tax consequences.

These are holding-period rules, not permission to sell before all the other conditions are satisfied. As of this article's October 2026 update, shares first acquired after July 4, 2025 have not yet reached the new three-year minimum.

How much gain can be excluded?

The eligible-gain ceiling generally uses the greater of an applicable dollar limit or 10 times the relevant adjusted basis of qualifying stock sold in that year, subject to special basis rules.

The starting dollar limit is generally $10 million for stock acquired on or before July 4, 2025, or $15 million for stock acquired after that date. The newer amount is indexed for taxable years beginning after 2026. These are per-taxpayer, per-issuer rules, with prior-exclusion, mixed-vintage, and marital-status adjustments. The two dollar amounts are not automatically additive, and the dollar exclusion does not reset each year.

For newer stock, apply the holding-period percentage to the eligible gain within the applicable limit. A $15 million eligible-gain ceiling at the three-year tier does not mean $15 million is excluded: 50% of $15 million is $7.5 million.

The taxable remainder of a partially excluded gain can face special federal capital-gain rules. State treatment and other taxes must also be evaluated; 'QSBS' does not mean every tax disappears.

What should you keep to support a claim?

Ask the company and your advisors for a share-by-share evidence file:

• Stock purchase, subscription, exercise, and issuance documents.
• Payment records, acquisition dates, tax basis, and any relevant Section 83(b) election.
• Capitalization records and evidence supporting the gross-asset test at issuance.
• Records supporting the company's business activities and active-business compliance over time.
• Redemption history, reorganizations, conversions, and other material corporate events.
• Gift documents, trust instruments, valuations, and the transferor's records when shares changed hands.
• A history of exclusions already claimed for this issuer.

A company's QSBS letter or an advisor's analysis can be useful evidence. Neither substitutes for the statutory requirements nor binds the IRS. Reconstructing the file after a sale is usually harder than maintaining it as the company grows.

How does QSBS fit into your estate plan?

Company stock may become the largest asset your family owns. Decide not only whether it qualifies for favorable tax treatment, but who should own it, who can manage it during incapacity, and who should receive its value.

Putting shares into your own revocable grantor trust generally does not create another federal income-tax taxpayer or another QSBS exclusion. Gifting qualifying shares to another individual or a properly structured non-grantor trust raises different questions. Our guide to QSBS stacking and packing explains the distinction and the risks.

Before a transfer, review company consent requirements, securities restrictions, gift and estate taxes, trust terms, and sale timing. Our trust funding checklist explains why signing a trust and actually transferring an asset are separate steps. Specialized QSBS planning requires coordinated tax and legal advice; a standard living trust is not a substitute.

Questions to ask before exercising, gifting, or selling

Does moving to another state guarantee a tax-free sale? No. States differ on Section 1202 conformity, residency, trust taxation, and sourcing. Review the relevant states rather than assuming the federal result controls.

What if a sale comes before the required holding period? Section 1045 may allow a rollover of eligible gain when qualifying stock held for more than six months is sold and replacement QSBS is purchased within 60 days. It is a deferral provision with its own conditions and election requirements, not an automatic Section 1202 exclusion.

Is my entire family entitled to separate exclusions? Not merely because they are beneficiaries of your estate plan. Actual ownership and taxpayer status matter. Transfers must be substantively valid and timely.

Before the next major equity decision, have your CPA and counsel confirm the share lot, acquisition date, issuer qualification, likely transaction structure, available exclusion, and state consequences. The best time to find a missing requirement is before you commit to the transaction.