QSBS can exclude a large share of US capital gains on qualifying small-company stock held 5+ years.
What it is
Qualified Small Business Stock (QSBS) is stock in a US domestic C corporation that meets the requirements of Internal Revenue Code §1202. A non-corporate shareholder who acquires the stock at original issuance, holds it long enough, and meets the other tests can exclude from federal tax a large share of the capital gain on its sale. The corporation must have run an active qualified business and had aggregate gross assets at or below a statutory cap at the time the stock was issued.
Why it matters
For founders, employees, and early investors in eligible startups, §1202 can turn a multi-million-dollar exit into a mostly or entirely tax-free gain at the federal level. The pitfall: the rules are narrow and easy to fail. Stock must be acquired directly from the company (not bought from another shareholder), the issuer must be a C corporation that stays under the asset cap and avoids excluded industries (most professional services, finance, hospitality, farming, mining), and many states do not follow the federal exclusion, so state tax can still apply.
How it's calculated
There is no single formula; eligibility is a checklist (C-corp, original issuance, asset cap, active qualified business, holding period). The excludable gain per issuer is capped at the greater of a dollar limit or 10 times the stock's adjusted tax basis. For stock acquired after July 4, 2025 the dollar cap is $15 million and the gross-asset test is $75 million (both indexed from 2027); for stock issued on or before that date the legacy $10 million cap and $50 million asset test apply.
How Quintarthai uses it
Use a company's deep-analysis page at /app/ to confirm whether an issuer is structured as a US C corporation before assessing any §1202 angle, and see the Knowledge Base for related cross-border tax entries.
Cross-border note. QSBS is a US-only provision under IRC §1202 and does not apply to Canadian corporations or to Canadian residents on non-US shares. Canada's closest analog is the Lifetime Capital Gains Exemption (LCGE) on qualified small business corporation (QSBC) shares, which shelters up to $1,250,000 of gain (2025) and requires a 90% active-business-asset test and a 24-month holding test rather than §1202's asset and 5-year rules.
FAQ
If I buy a startup's shares from a departing employee on the secondary market, can I claim QSBS?
No. §1202 requires acquisition at original issuance directly from the corporation in exchange for cash, property, or services. Shares bought from another shareholder do not qualify, even if the company otherwise meets every test.
Does the 100% federal exclusion mean I owe no tax at all on the sale?
Not necessarily. The 100% exclusion (for QSBS acquired after September 27, 2010 and held more than five years) removes federal tax up to the per-issuer cap, but many US states do not conform to §1202, so state income tax can still apply.
Check your understanding
An investor acquires stock directly from a US C corporation in 2026 when the company's aggregate gross assets are $40 million, then sells five and a half years later for a $9 million gain. Assuming all other §1202 tests are met, what is the most likely federal capital-gain treatment?
Under the OBBBA tiered rules for stock acquired after July 4, 2025, holding at least five years earns the 100% exclusion, and a $9 million gain is under the $15 million per-issuer cap; the $40 million asset level is below the post-July-2025 $75 million threshold (and even the legacy $50 million one).