QSBS at a glance
| Stock issued on or before July 4, 2025 | Stock issued after July 4, 2025 | |
|---|---|---|
| Per-company exclusion cap | Greater of $10 million or 10× basis | Greater of $15 million or 10× basis |
| Holding period | 5 years for any exclusion | 50% at 3 years, 75% at 4 years, 100% at 5 years |
| Company gross asset limit | $50 million | $75 million |
| Pennsylvania income tax on the gain | Taxed; Pennsylvania does not follow the federal exclusion | |
Federal rules under Internal Revenue Code Section 1202 as amended by the 2025 tax law (P.L. 119-21). The $15 million cap and $75 million limit are indexed for inflation beginning in 2027.
What QSBS is
Qualified small business stock is stock in a U.S. C corporation that meets the requirements of Section 1202. If you hold it long enough, some or all of your gain on a sale is excluded from federal income tax, up to a cap that applies separately to each company and each taxpayer.
For founders, early employees, and angel investors in a successful company, the exclusion is often the single largest tax benefit available on an exit. It is also easy to lose through a corporate decision made years earlier, which is why the details are worth reviewing well before a sale.
Who qualifies
Both the company and the shareholder have to meet the rules:
- A domestic C corporation. S corporation and LLC interests do not qualify. Converting to a C corporation can start a new QSBS clock, though only growth after the conversion is eligible.
- Original issuance. You must acquire the stock directly from the company, generally for cash, property other than stock, or services. Shares bought from another shareholder do not qualify.
- Gross asset test. The company’s aggregate gross assets must be $75 million or less ($50 million for stock issued on or before July 4, 2025) at all times before and immediately after the stock is issued.
- Active business test. During substantially all of your holding period, at least 80% of the company’s assets must be used in an active qualified trade or business.
- Not an excluded field. Businesses in health, law, engineering, architecture, accounting, actuarial science, performing arts, consulting, athletics, financial services, and brokerage do not qualify, nor do banking, insurance, financing, leasing, investing, farming, hotels, and restaurants, or businesses whose principal asset is the reputation or skill of employees, among others.
- A non-corporate holder. Individuals, trusts, and estates can claim the exclusion, and partners in a partnership can in many cases.
How much is excluded
For each company, your excluded gain is limited to the greater of two amounts: a flat cap ($15 million for stock issued after July 4, 2025, or $10 million for older stock) or 10 times your adjusted basis in the shares sold. For most founders with a low basis, the flat cap is the binding limit. The cap is a lifetime limit for each company: gain you excluded in earlier years on the same company’s stock reduces what is left.
For stock issued after July 4, 2025, the share of the gain you can exclude depends on how long you held it:
| Held at least | Gain excluded | Remaining gain |
|---|---|---|
| 3 years | 50% | Taxed at a 28% federal rate |
| 4 years | 75% | Taxed at a 28% federal rate |
| 5 years | 100% | None, up to the cap |
Stock issued on or before July 4, 2025 still needs a full five-year hold. For most of that stock (acquired after September 27, 2010), the exclusion is 100% once the five years are met.
A worked example
A Chester County founder received shares in her C corporation in 2026 with a negligible basis. She later sells them for a $12 million gain.
| When she sells | Federal tax on the gain | Pennsylvania tax |
|---|---|---|
| Not QSBS (long-term capital gain at 23.8%) | $2,856,000 | $368,400 |
| QSBS held 3 years (50% excluded) | $1,908,000 | $368,400 |
| QSBS held 4 years (75% excluded) | $954,000 | $368,400 |
| QSBS held 5 years (100% excluded) | $0 | $368,400 |
Every federal figure includes the 3.8% Net Investment Income Tax, which generally applies to gain that is not excluded. For partial exclusions, the non-excluded gain is taxed at 28% plus 3.8%. Pennsylvania taxes the full gain at its flat 3.07% rate in every case.
Hypothetical and simplified for illustration; assumes all QSBS requirements are met and the gain is within the $15 million cap. Actual results depend on your facts.
Pennsylvania does not follow QSBS
Pennsylvania personal income tax does not recognize the Section 1202 exclusion, so a gain that is tax-free federally is still taxed at 3.07% in Pennsylvania. Several other states, including California, also do not conform. Where you live when you sell matters.
Founder or early investor?
We’ll review whether your shares are likely to qualify, map the holding-period dates that matter, and coordinate the analysis with your CPA and corporate counsel before a sale.
Schedule a call →Ways families get more out of QSBS
- Hold for the full term. For newer stock, a sale at year four instead of year five can cost a quarter of the exclusion, so deal timing deserves attention early.
- Multiply the cap with gifts. The cap applies per taxpayer, and QSBS keeps its status and holding period when given away. Gifts of shares to children or to properly structured non-grantor trusts can create additional caps. The IRS has signaled interest in aggressive trust structures, so this needs careful legal work.
- Roll over instead of selling out. If you sell QSBS held more than six months and reinvest the proceeds in other QSBS within 60 days, Section 1045 lets you defer the gain.
- Consider converting to a C corporation. Owners of S corporations and LLCs can convert so future stock issued by the C corporation can qualify. Our QSBS calculator compares that against staying an S corporation.
- Document qualification as you go. Ask the company for records showing it met the gross asset and active business tests when your shares were issued. Reconstructing them at a sale is much harder.
Frequently asked questions
What is QSBS?
Qualified small business stock (QSBS) is stock in a U.S. C corporation that meets the requirements of Internal Revenue Code Section 1202. If held long enough, some or all of the gain on a sale is excluded from federal income tax, up to a per-company cap of $15 million for stock issued after July 4, 2025, or $10 million for older stock, or 10 times your basis if greater.
How long do you have to hold QSBS?
For stock issued after July 4, 2025, you can exclude 50% of the gain after three years, 75% after four years, and 100% after five years. Stock issued on or before July 4, 2025 must be held for five years to receive any exclusion.
How is the non-excluded part of QSBS gain taxed?
When only 50% or 75% of the gain is excluded, the remaining gain is taxed at a 28% federal rate rather than the usual 20% long-term capital gains rate, and the 3.8% Net Investment Income Tax generally applies to it as well.
Does Pennsylvania tax QSBS gains?
Yes. Pennsylvania does not follow the federal Section 1202 exclusion, so gain that is excluded from federal tax is still subject to Pennsylvania personal income tax at the flat 3.07% rate.
Can S corporation or LLC owners get the QSBS exclusion?
Not on their current interests. QSBS must be stock in a C corporation acquired at original issuance. An S corporation or LLC can convert to a C corporation, and stock received in or after the conversion can qualify, with the holding period starting at that point. Only gain after the conversion date is eligible for the exclusion.