By Harry Prabandham · Updated September 27, 2026
Equity Compensation
QSBS (Section 1202): Who Qualifies and How Much Is Excluded
QSBS can exclude federal gain on qualifying startup stock: up to $15M or 10x basis for stock issued after July 4, 2025. California still taxes it.
QSBS (Section 1202): Who Qualifies and How Much Is Excluded
1 / 7
What is QSBS?
- Section 1202 lets individuals and other non-corporate holders exclude some or all federal capital gain on qualifying stock bought at original issuance.
- The cap applies per company: each taxpayer has a separate limit for each issuer's stock.
- The rules depend on when the stock was issued; the One Big Beautiful Bill Act changed them for stock issued after July 4, 2025.
- It is a federal benefit only; California does not conform, so California residents generally owe full state tax on the gain.
Try Our Free Tools
Full Guide
What is QSBS?
- Section 1202 lets individuals and other non-corporate holders exclude some or all federal capital gain on qualifying stock bought at original issuance.
- The cap applies per company: each taxpayer has a separate limit for each issuer's stock.
- The rules depend on when the stock was issued; the One Big Beautiful Bill Act changed them for stock issued after July 4, 2025.
- It is a federal benefit only; California does not conform, so California residents generally owe full state tax on the gain.
How much gain can be excluded?
- Stock issued after July 4, 2025: the cap is the greater of $15 million, indexed for inflation after 2026, or 10x your basis.
- That newer stock earns a 50% exclusion after three years, 75% after four, and 100% after five.
- Stock issued from September 28, 2010 through July 4, 2025: the cap is the greater of $10 million or 10x basis, with 100% after five years.
- On a partial exclusion, the taxable portion is taxed at a 28% rate, and the 3.8% net investment income tax can apply.
Does the company qualify?
- It must be a domestic C-corporation when the stock is issued and during substantially all of your holding period.
- Gross assets cannot exceed $75 million before and right after issuance for stock issued after July 4, 2025, or $50 million for earlier stock.
- At least 80% of assets must be used in an active qualified business.
- Excluded fields include health, law, accounting, consulting, financial services, farming, hospitality, and businesses built on employees' reputation or skill.
Which shares count, and when does the clock start?
- Shares must come from the company in exchange for money, property, or services, not from another shareholder.
- Options and RSUs don't qualify until they become shares, so the holding period starts at exercise or settlement.
- SAFEs and convertible notes raise open questions about when the holding period begins, and advisers differ.
- Company buybacks around the time shares are issued can disqualify stock under Section 1202's redemption rules.
Reporting and documentation
- Sales go on Form 8949 and Schedule D, with the exclusion shown as an adjustment.
- Records showing C-corp status, gross assets at issuance, original-issue purchase, and business activity support the claim.
- Many companies will provide a QSBS statement on request, which helps but does not settle eligibility on its own.
- The IRS generally has three years to audit a return, extended to six if income is substantially understated.
Common planning ideas and pitfalls
- Gifts to family members or certain non-grantor trusts can give each recipient a separate cap, though trust strategies draw IRS scrutiny.
- Recipients of gifted QSBS generally keep the donor's holding period and qualification.
- A Section 1045 rollover can defer gain on QSBS held over six months if proceeds buy new QSBS within 60 days.
- Converting an LLC to a C-corp can start eligibility, but only appreciation after the conversion can qualify.
Key takeaways
- QSBS can exclude federal capital gain on qualifying startup stock, with limits based on the issue date.
- Stock issued after July 4, 2025: $15 million or 10x basis, a $75 million asset test, and 50/75/100% at three, four, and five years.
- California taxes the gain, so California residents need to plan for state tax.
- Eligibility is fact-specific; confirm with a CPA or tax attorney before relying on it.
Related Topics
Tax Planning
QSBS Stacking Strategies: Gifts, Trusts, and Section 1045 Rollovers
QSBS stacking uses gifts to family members and non-grantor trusts so more than one taxpayer can claim the §1202 exclusion cap on the same company's stock.
Equity CompensationEarly Exercise and the 83(b) Election, Explained
Early exercise lets you buy unvested option shares now. An 83(b) election, due within 30 days, taxes them at today's value instead of at each vest.
Tax PlanningLeaving California With Stock Options or RSUs: What the State Still Taxes
California taxes equity pay earned while you worked there, even after you move, using a workday ratio. Later appreciation follows your new residence.