The QSBS exclusion under Section 1202 of the Internal Revenue Code can allow an eligible shareholder to exclude some or all of the federal gain on the sale of qualified small business stock, and the 2025 tax law (Public Law 119-21) changed the rules for stock acquired after July 4, 2025.1 Those changes added shorter holding-period tiers, raised the per-issuer dollar cap from $10 million to $15 million, and raised the corporate gross-assets limit from $50 million to $75 million.1,4
This article explains who qualifies, how the new tiers compare with the rules for older stock, how the per-issuer cap works, how partially excluded gain is taxed, and what a rollover under Section 1045 can do for shareholders who sell early.
Quick Answer The QSBS exclusion lets a non-corporate shareholder exclude federal gain on qualified small business stock: C corporation stock acquired at original issue from a company with gross assets under the statutory limit that runs a qualified active business.1 For stock acquired after July 4, 2025, the exclusion is 50% after three years, 75% after four years, and 100% after five years, capped per issuer at the greater of $15 million or 10 times basis.1 Stock acquired on or before that date keeps the prior rules, including the $10 million cap.1,4 |
What Qualifies for the QSBS Exclusion
Section 1202 sets several requirements that apply to both the company and the shareholder.1
- C corporation stock. The issuing company must be a domestic C corporation; S corporation and partnership interests do not qualify.1
- Original issue. The shareholder must acquire the stock at original issue, directly or through an underwriter, in exchange for money, other property (not stock), or as compensation for services.1
- Gross-assets test. For stock issued after July 4, 2025, the corporation’s aggregate gross assets cannot exceed $75 million before and immediately after the issuance; the prior limit was $50 million.1
- Active business. At least 80% of the corporation’s assets, by value, must be used in the active conduct of a qualified trade or business during substantially all of the holding period.1
- Excluded fields. Services in fields such as health, law, engineering, architecture, accounting, consulting, financial services, and brokerage do not qualify, nor do banking, insurance, farming, certain extraction businesses, and hotels or restaurants.1
The exclusion is available to taxpayers other than corporations, which includes individuals and, subject to the statute’s pass-through rules, certain trusts and partnerships.1
How the 2025 Changes Altered the Holding Period
Before the 2025 law, QSBS generally had to be held for more than five years to qualify for any exclusion. For stock acquired after July 4, 2025, Section 1202 now uses an “applicable percentage” that rises with the holding period: 50% for at least three years, 75% for at least four years, and 100% for five years or more.1
Stock acquired on or before July 4, 2025 remains under the earlier framework, including the $10 million per-issuer cap.1,4 By our calculation, the earliest a shareholder could reach the new three-year tier on post-enactment stock is July 2028.
QSBS Rules Before and After July 4, 2025
Rule | Stock acquired on or before July 4, 2025 | Stock acquired after July 4, 2025 |
Holding period and exclusion | More than 5 years for the exclusion1 | 50% at 3 years, 75% at 4 years, 100% at 5 years1 |
Per-issuer dollar cap | $10 million (greater of that or 10 times basis)1 | $15 million (greater of that or 10 times basis), indexed for inflation after 20261 |
Corporate gross-assets limit | $50 million1 | $75 million for stock issued after July 4, 20251 |
Rate on non-excluded portion | 28-percent rate gain on any portion not excluded3 | 28-percent rate gain on the non-excluded portion3,4 |
Assumptions: the shareholder is not a corporation, and the stock otherwise meets the original-issue and active-business requirements. The exclusion percentage for stock acquired on or before July 4, 2025 depends on the acquisition date. This table summarizes general federal rules and does not cover state tax treatment or every exception.
How the Per-Issuer Cap Works
The QSBS exclusion is limited on a per-issuer basis. For each corporation, the gain eligible for exclusion in a year is capped at the greater of the applicable dollar limit or 10 times the shareholder’s adjusted basis in the stock sold that year.1
For stock acquired after July 4, 2025, the dollar limit is $15 million, reduced by eligible gain already taken from that issuer. For taxable years beginning after 2026, the $15 million figure is adjusted for inflation.1 For older stock, the dollar limit remains $10 million, or $5 million for married individuals filing separately.1
How Partially Excluded Gain Is Taxed
When only 50% or 75% of the gain is excluded, the portion that remains taxable is not treated like ordinary long-term capital gain. Federal law classifies it as “section 1202 gain,” which falls within the 28-percent rate gain category.3
According to Greenberg Traurig, that taxable portion is also subject to the 3.8% net investment income tax, and the firm states that excluded QSBS gain remains exempt from alternative minimum tax calculations both before and after the 2025 law.4 Shareholders can review the effect of each tier with a CPA before choosing a sale date. Our article How to Build a Personal Wealth Plan Before a Business Sale covers the broader sequencing.
What a Section 1045 Rollover Can Do
A shareholder who sells QSBS before meeting the holding period does not necessarily lose the benefit. Under Section 1045, a taxpayer other than a corporation that has held QSBS for more than six months can elect to defer gain by purchasing replacement QSBS within the 60-day period beginning on the date of the sale.2
Gain is recognized only to the extent the amount realized exceeds the cost of the replacement stock.2 The rollover has its own requirements, so it is a decision to coordinate with a CPA and attorney before the sale closes.
Questions Founders Can Raise With Their Advisors
- Was my stock acquired before or after July 4, 2025, and which set of rules applies?1
- Did the company meet the gross-assets test when my shares were issued, and does it meet the active business requirement?1
- Is my expected gain above the per-issuer cap, and would 10 times basis produce a higher limit?1
- If a sale may happen before the next holding-period tier, how would the 28-percent rate gain and the net investment income tax affect the result?3,4
- Would a Section 1045 rollover fit my situation if I sell early?2
Frequently Asked Questions
The QSBS exclusion under Section 1202 allows a non-corporate shareholder to exclude federal gain on the sale of qualified small business stock, which is C corporation stock acquired at original issue from a company that meets the gross-assets and active-business requirements.1
For stock acquired after July 4, 2025, Section 1202 provides a 50% exclusion after three years, 75% after four years, and 100% after five years or more. Stock acquired on or before that date generally must be held more than five years.1
For each issuer, eligible gain is capped at the greater of the applicable dollar limit or 10 times the adjusted basis of the stock sold. The dollar limit is $15 million for stock acquired after July 4, 2025 and $10 million for earlier stock.1
Section 1202 excludes service fields such as health, law, engineering, architecture, accounting, consulting, financial services, and brokerage, as well as banking, insurance, farming, certain extraction businesses, and hotels or restaurants.1
Under Section 1045, a non-corporate shareholder who has held QSBS for more than six months can elect to defer gain by buying replacement QSBS within 60 days of the sale. Gain is recognized only to the extent the sale proceeds exceed the cost of the replacement stock.2
Where This Fits Into a Broader Financial Plan
QSBS planning touches entity structure, the timing of a sale, estate and gifting decisions, and how sale proceeds will be invested afterward, which is why we approach it as part of a founder’s broader financial plan. As an independent, fee-only fiduciary, Moran Wealth Management does not receive commissions or product incentives. We coordinate with each client’s CPA, attorney, and transaction advisors so that holding periods and caps are considered alongside the rest of the plan. We do not provide legal or tax advice directly. Each professional retains responsibility for their own advice and work, and results can vary based on individual circumstances.
If you hold founder or early-investor stock and are considering a sale, schedule a complimentary consultation with our team.
Call 239-920-4440, or email info@moranwm.com.
Sources
[1] 26 U.S. Code § 1202, Partial Exclusion for Gain From Certain Small Business Stock, Legal Information Institute, Cornell Law School.
[2] 26 U.S. Code § 1045, Rollover of Gain From Qualified Small Business Stock to Another Qualified Small Business Stock, Legal Information Institute, Cornell Law School.
[3] 26 U.S. Code § 1, Tax Imposed (subsection (h), maximum capital gains rate), Legal Information Institute, Cornell Law School.
[4] Qualified Small Business Stock (QSBS) Regime Expanded Under ‘One Big Beautiful Bill Act’, Greenberg Traurig, July 18, 2025.
[5] 1202 OBBB Changes, Annette Nellen, San José State University.
We do not provide tax or legal advice; please consult your CPA, attorney, or registered tax professional for individualized tax or legal advice.
This communication does contain content generated or assisted by artificial intelligence (AI). While reviewed for accuracy, AI-generated content may not fully reflect all nuances of your individual circumstances. Please consult your advisor directly for personalized guidance.