Equity
QSBS Exclusion (Section 1202): How It Saves You $50,000-$2,000,000+ in 2026
Section 1202 allows you to exclude up to 100% of gain (capped at the greater of $10M or 10x your cost basis) on the sale of Qualified Small Business Stock (QSBS). The stock must be from a C-corporation with under $50M in gross assets at the time of issuance, and you must hold it for at least 5 years. For startup founders and early employees, this can mean millions in completely tax-free gains.
Who Qualifies
- Acquired stock directly from a qualifying C-corporation (not from another shareholder)
- Corporation had gross assets under $50M at time of stock issuance
- Held the stock for 5+ years
- Corporation is an active business (not investment, real estate, or financial services)
Who does NOT qualify
- Stock acquired on the secondary market
- S-corporation or LLC stock (must be a C-corp)
- Corporation had over $50M in gross assets at issuance
- Held for less than 5 years
How the Math Works
Gain: $4.9M. QSBS exclusion: 100% of gain up to the greater of $10M or 10x basis ($1M). Full $4.9M gain is excluded.
Tax savings: $4.9M × 23.8% (20% capital gains + 3.8% NIIT) = $1,166,200 in completely eliminated federal tax.
Legal Basis & IRC Citations
- IRC §1202: Partial exclusion for gain from certain small business stock
- IRC §1202(b): Per-issuer limitation ($10M or 10x basis)
- IRC §1202(d): Qualified small business defined ($50M gross asset test)
OBBBA Update: OBBBA reduced the QSBS exclusion to 75% (from 100%) for stock acquired after a certain date and gains exceeding $15M. Consult your CPA on whether your stock was acquired before the cutoff date for full exclusion.
What to Tell Your CPA
“I'm planning to sell QSBS stock acquired in [year] from [company name], a C-corporation that had under $50M in gross assets at the time. I've held it for [X] years. My cost basis is $[X] and expected gain is $[X]. Can you confirm QSBS eligibility and whether the OBBBA changes affect my exclusion amount?”
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Frequently Asked Questions
What qualifies as QSBS?
Stock in a domestic C-corporation with under $50M in gross assets at the time you acquired the stock. The corporation must be an active business (at least 80% of assets used in active business). You must acquire the stock at original issuance (not secondary market).
How much gain can I exclude?
Up to the greater of $10M or 10x your cost basis, per issuer. Under OBBBA, this may be reduced to 75% for stock acquired after certain dates or gains exceeding $15M.
Does QSBS apply to startup employees?
Yes, if you received stock (not just options) from a qualifying C-corporation at original issuance, typically through early exercise of ISOs or purchase of founder shares. RSUs generally don't qualify because the stock is acquired at vesting, not original issuance.
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