Qualified small business stock, or QSBS, is one of the most valuable provisions in the tax code for early shareholders, and one of the most misunderstood. It can exclude a large portion, sometimes all, of the gain on qualifying stock from federal tax. It also has strict requirements, and many shares don't qualify.
The basic tests
- The company must be a domestic C corporation.
- You must have acquired the stock directly from the company at original issuance, not bought it from another shareholder.
- The company's gross assets must have been below a limit when your stock was issued: $50 million for stock issued on or before July 4, 2025, and $75 million for stock issued after.
- The company must use its assets in an active, qualifying business. Some fields, including many professional services and financial businesses, are excluded.
- You must hold the stock for a minimum period.
How much can be excluded
The exclusion is capped per company at the greater of a dollar limit or 10 times your basis in the stock. For stock issued after July 4, 2025, the dollar limit is $15 million, indexed for inflation in future years, up from $10 million. The holding period rules changed as well.
| Time held |
Stock issued on or before July 4, 2025 |
Stock issued after July 4, 2025 |
| Less than 3 years |
No exclusion |
No exclusion |
| 3 years |
No exclusion |
50% |
| 4 years |
No exclusion |
75% |
| 5 years or more |
100% (for stock acquired after September 27, 2010) |
100% |
Details that trip people up
- For shares from exercised options, the holding period generally starts when you exercise, not when the options were granted.
- For RSUs, the relevant date is generally when the shares are delivered to you.
- The asset test applies when your specific shares were issued. Shares issued after a company has grown past the limit generally don't qualify, even if earlier shares did.
- States don't all follow the federal rule. California, for example, doesn't offer the exclusion.
Ask, don't assume. Whether your shares qualify depends on facts only your company and a tax professional can confirm: when your shares were issued, the company's asset size at that time, and how you acquired them. Treat QSBS as a question to ask, not an assumption to plan around.