For founders, investors, and startup employees, minimizing capital gains taxes can have a massive financial impact. One of the most powerful—and often overlooked—tax incentives available is the Qualified Small Business Stock (QSBS) Exemption, outlined under Section 1202 of the Internal Revenue Code.
If you’re involved with an early-stage business, understanding how to qualify for and benefit from QSBS could potentially save you millions. In this guide, we’ll break down what QSBS is, how it works, who qualifies, and key strategies to maximize your exemption.
Qualified Small Business Stock (QSBS) refers to shares issued by a domestic C corporation that meets certain requirements under IRC Section 1202. If the stock is held for at least five years, and other conditions are met, a taxpayer may exclude up to 100% of the capital gains from federal taxes—subject to specific limits.
Here’s why QSBS is such a game-changer:
The QSBS exemption was first introduced in 1993 to encourage investment in small businesses. The percentage of excluded gains increased over time:
As of today, most QSBS-eligible shares qualify for 100% exemption, making the incentive more relevant than ever.
Use this quick-reference checklist to see if you (or your stock) may qualify for the QSBS exemption:
Company Requirements:
Stockholder Requirements:
If you can check all boxes, you're likely eligible—but professional tax guidance is critical to confirm.
Most startups in technology, biotech, and services can qualify, but certain industries are excluded. Section 1202 excludes businesses in:
Essentially, businesses where the primary asset is the skill of the owner may not qualify. That said, each case should be reviewed carefully, and a CPA experienced in QSBS can help evaluate eligibility.
The amount you can exclude is the greater of:
You purchased $300,000 in qualifying stock.
You purchased $1 million in stock, which you later sell for $15 million
This exclusion applies per issuer, meaning the cap resets for each separate company’s QSBS you hold.
Founders who acquire original issuance stock from their company or convert their LLC to a C-corp early and hold stock for 5+ years can see life-changing tax savings upon exit.
Stock options (if exercised early) or RSAs can become QSBS-eligible if structured correctly.
Investors who purchase stock directly from a qualifying C-corp can take advantage of the exemption—especially in high-growth sectors.
QSBS eligibility can be lost for avoidable reasons. Here are the most common missteps:
QSBS doesn’t exist in a vacuum. Here’s how it interacts with other planning opportunities:
Allows you to sell QSBS before 5 years and roll the gains into new QSBS within 60 days—preserving your potential exemption.
QSBS can be gifted to multiple trusts, potentially multiplying the $10M exclusion per trust. Strategic estate planning is key here.
QSBS-eligible businesses often qualify for the R&D tax credit as well. These are independent benefits but if you have to qualify R&D expenses, this may affect your $50M cap. A tax strategist can help minimize this burden.
QSBS gains excluded under Section 1202 are not subject to AMT or the Net Investment Income Tax (NIIT)—making them even more valuable compared to standard capital gains.
Yes—QSBS can be gifted without resetting the holding period, and certain trusts can be used to multiply the exclusion across beneficiaries. QSBS "Stacking" is a popular yet complex strategy. Transferring QSBS stock via gifting requires strategic planning to avoid disqualification or tax complications.
If you must sell before the five-year mark, Section 1045 may allow you to roll over gains into another QSBS investment within 60 days, preserving your tax benefit.
Not all states conform to the federal QSBS rules. For example:
Understanding your state tax treatment is essential when calculating your total potential savings.
QSBS has come under scrutiny in recent tax reform discussions. However, 2025 proposals have included strengthening the benefit with a higher capital gain exclusion and a $75M asset cap vs the current $50M cap.
Here are actionable strategies to optimize your QSBS benefit:
Navigating QSBS rules and planning ahead can unlock major tax savings, but missteps are easy—and expensive. At Anomaly CPA, we specialize in offering outsourced accounting to founders, investors, and startup employees understand and leverage complex tax incentives like QSBS, the R&D credit, and more.
Reach out to the Anomaly CPA team for a personalized consultation to see how the QSBS exemption can benefit your long-term financial strategy.
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