Section 1202 lets founders and early investors in qualifying C corporations exclude a substantial portion of capital gain on the sale of “qualified small business stock.” The One Big Beautiful Bill Act of 2025 (OBBBA) meaningfully upgraded the rules for stock issued after July 4, 2025. Both regimes now run in parallel — which one applies depends on when the specific shares were issued.
Read carefully. QSBS eligibility is complicated, the post-OBBBA regime is new, and the rules depend on stock-issuance date, corporate form, gross-asset test, active-business test, and the shareholder’s holding period. This page is a reference, not tax advice. Every real transaction requires a tax opinion from a qualified advisor.
Current (post-OBBBA)
Post-OBBBA (stock issued after July 4, 2025)
For stock originally issued after July 4, 2025.
Exclusion by holding period
Holding period
Excluded
Note
3 years
50%
New tier under OBBBA — first time gain exclusion is available before 5 years.
4 years
75%
New tier under OBBBA.
5+ years
100%
Full exclusion, same as post-2010 rules.
Per-issuer cap
Greater of $15 million or 10× aggregate adjusted basis in the QSBS.
Qualified small business test
Gross assets ≤ $75 million at issuance (indexed for inflation).
Exclusion applies to
Federal capital gains tax
Alternative minimum tax (AMT)
Net Investment Income Tax (NIIT) of 3.8%
Legacy (pre-OBBBA)
Pre-OBBBA (stock issued on or before July 4, 2025)
For stock originally issued between September 28, 2010 and July 4, 2025 (100% exclusion). Different exclusion percentages apply to earlier vintages.
Exclusion by holding period
Holding period
Excluded
Note
< 5 years
0%
No exclusion is available prior to a 5-year holding period under the pre-OBBBA regime.
5+ years (issued after Sept 27, 2010)
100%
100% exclusion, up to the per-issuer cap.
5+ years (issued Feb 18, 2009 – Sept 27, 2010)
75%
Only 75% of gain is excludable.
5+ years (issued prior to Feb 18, 2009)
50%
Only 50% of gain is excludable; 7% AMT preference item applies.
Per-issuer cap
Greater of $10 million or 10× aggregate adjusted basis in the QSBS.
Qualified small business test
Gross assets ≤ $50 million at issuance.
Exclusion applies to
Federal capital gains tax (100% tier only)
Alternative minimum tax (AMT) for post-Sept 2010 issuances
Net Investment Income Tax (NIIT)
Six qualifying requirements
These conditions apply under both regimes. The tighter requirements are the corporate-form test (must be C-corp), the gross-asset test at issuance, and the “qualified trade or business” exclusion of professional services and financial businesses.
Corporate form
Issuer must be a domestic C corporation at the time of issuance and generally throughout the holding period. LLCs, S corporations, and partnerships do not directly qualify (though F-reorg conversions to C-corp status can create QSBS eligibility going forward).
Original issuance
The shareholder must have acquired the stock at original issuance directly from the corporation (or an underwriter), in exchange for money, property, or services. Secondary-market purchases do not qualify.
Gross-asset test
Aggregate gross assets of the corporation immediately before and after issuance must not exceed $75M (post-OBBBA) / $50M (pre-OBBBA).
Qualified trade or business
The corporation must use at least 80% of assets in a qualified trade or business. Ineligible activities include: professional services (law, accounting, health, consulting, financial), banking/insurance/financing, farming, mining/extraction, hospitality (hotels, motels, restaurants).
Active business requirement
The 80% active-business test must be met during substantially all of the shareholder's holding period.
Holding period
Pre-OBBBA: 5-year minimum before any exclusion is available. Post-OBBBA: tiered exclusions begin at 3 years.
How QSBS shows up in M&A deal work
Founder tax modeling
For every M&A sale of a C-corp company, the founder’s equity waterfall gets a QSBS analysis. A $50M gain on qualifying stock can go from ~$11.9M federal tax to zero — enough to change which deal structure a founder is willing to sign.
Stacking
The per-taxpayer, per-issuer cap can be multiplied through gift trusts (each non-grantor trust is its own taxpayer). Skilled wealth advisors can layer QSBS to exclude gains materially above the base cap.
Rollover math
If part of the exit is rollover equity, the tax deferral works alongside QSBS exclusion — but rollover into a non-corporate HoldCo can break QSBS treatment. Structure matters.
F-reorg conversions
An S-corp or LLC can convert to a C-corp; the QSBS clock starts at conversion. Sponsors sometimes push for this pre-close to preserve QSBS on management’s rollover equity in the new HoldCo.
Sources & data provenance
Data on this page reflects the state of primary sources as of .
This page is a reference summary of statutory rules. It is not tax advice; QSBS eligibility for a specific transaction requires analysis by a qualified tax professional, including a review of the corporation’s historical asset tests, activities, and any redemption transactions.