Qualified Small Business Stock (QSBS): Why It Matters More Than Ever
Qualified Small Business Stock (QSBS) is one of the most powerful tax breaks for founders, early employees, and startup investors. Under federal law, the §1202 exclusion can eliminate federal capital gains tax on the greater of $10 million ($15 million under the new OBBBA) or 10× your original investment when you sell qualifying small-business stock.
QSBS benefits apply when founders or early employees sell shares of a qualifying company, and can also flow to investors in venture or private-equity funds via gain allocations or in-kind share distributions after an acquisition or IPO. To qualify, the stock must be originally issued by a U.S. C corporation with ≤ $50 million ($75 million under the OBBBA) in gross assets immediately before and after issuance. In order for the stock to qualify, you must hold the stock for at least five years (with updated holding periods for QSBS acquired after 7/4/25).
QSBS Savings Example
Jane purchased QSBS for $100 on January 28, 2016. She sold her stock on January 29, 2021 for $10,500,000. She excluded $10 million of gain, saving roughly $2.38 million in federal taxes. The remaining $499,900 of gain was taxed at the standard long-term capital gains rate.
Special Rules for Acquisitions & Early Sales
If QSBS stock is sold or disposed before the required holding period has been reached and the QSBS converts into the buyer’s stock in certain merger or reorganization transactions, the holding period may “tack” so you may still qualify once you have reached the required holding period. Please note, however, that the tax exclusion is limited to the built-in gain at the deal date.
If you sell before the required holding period has been reached, you can still also preserve the benefit by rolling the proceeds into new QSBS within 60 days under §1045.
State Tax Considerations
State rules vary, so it is always wise to verify your state’s position on QSBS tax treatment. For example, California does not conform to federal QSBS rules, meaning you’ll still owe state capital gains tax even if you qualify federally.
New in 2025 – The One Big Beautiful Bill Act (OBBBA)
The OBBBA introduced phased-in benefits for QSBS issued after July 4, 2025 while keeping the old rules for prior issuances.
QSBS Rules: Before and After OBBBA (July 4, 2025)
Note: Under pre‑OBBBA law, 50% exclusions were subject to a 7% AMT add‑back; the 75% and 100% exclusions were not. State conformity varies; California does not conform to federal QSBS treatment.
QSBS Post 7/4/25 – Expanding QSBS
- No more all‑or‑nothing five‑year holding period for tax exclusion.
- More companies qualify as QSBS issues under the higher asset cap.
- Larger exclusion cap increases potential lifetime tax savings.
What You Should Do Now
- Confirm your QSBS eligibility and track issuance dates carefully.
- Identify which shares are “old QSBS” (pre‑July 4, 2025) vs. “new QSBS” (post‑July 4, 2025).
- Plan potential exits around the 3‑, 4‑, and 5‑year holding milestones.
- Keep complete records of issuance, gross assets, and business activity.
QSBS can deliver meaningful tax savings, but the rules can be very nuanced and complex. We’re happy to review your holdings to help you confirm QSBS eligibility. For detailed guidance on qualifications, exclusions and roll over strategies, please reach out to your Realize advisor to discuss your specific situation and make the most of any available QSBS tax savings.
Realize Your Business Goals
Every business, from start-ups to seasoned operations, needs a proactive trusted advisor working for its best interest. Whether your business is technology, venture capital or real estate, Realize can ensure your accounting and tax compliance needs are met. We provide your company with meaningful business advice and make certain you are taking advantage of the tax saving opportunities available to you.
