What is the QSBS exclusion under § 1202?

IRC § 1202 allows an individual taxpayer to exclude from federal income tax up to 100% of the gain on the sale of qualified small business stock (QSBS), held more than five years. The exclusion is capped at the greater of $10 million per issuer or 10× the taxpayer's adjusted basis in the QSBS sold. The 100% exclusion applies to stock acquired after September 27, 2010.

What qualifies as QSBS?

Stock issued by a domestic C corporation with aggregate gross assets of $50 million or less at the time of issuance and immediately after, acquired by the taxpayer at original issue (not from another stockholder) in exchange for money, property, or services. The corporation must use at least 80% of its assets in the active conduct of a qualified trade or business throughout substantially all of the taxpayer's holding period.

What businesses are disqualified?

Service businesses where the principal asset is the reputation or skill of one or more employees (health, law, accounting, consulting, financial services, brokerage, etc.), banking, insurance, financing, leasing, investing, farming, mining, and hospitality (hotels, restaurants). Tech, manufacturing, retail, and most product-based businesses qualify.

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QSBS exclusion calculator.

Model the IRC § 1202 federal tax exclusion on qualified small business stock at exit. Includes the greater-of-$10M-or-10×-basis per-issuer cap, the 5-year holding-period check, and the federal tax savings vs. a non-QSBS sale.

Holding-period status (5-year rule)
Per-issuer cap: max($10M, 10× basis)
Excludable vs. taxable gain split
Federal tax savings projection

Open the calculator

Stock facts

Acquisition date (date of original issuance)

For QSBS treatment, you must hold for > 5 years from this date.

Projected sale date

Adjusted basis per share

For founder stock, this is typically par value or the formation price.

Sale price per share

Tax assumptions

Federal long-term capital gains rate

Includes the 3.8% NIIT where applicable; adjust if it doesn’t apply.

Exclusion percentage

100% for stock acquired after Sep 27, 2010. 75% for Feb 18, 2009 – Sep 27, 2010. 50% for earlier.

Holding period

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Enter the acquisition and sale dates.

Gain & exclusion math

Sale proceeds

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Total adjusted basis

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Total gain

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Per-issuer cap (max $10M or 10× basis)

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Excludable gain (subject to cap)

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Taxable gain (above cap)

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Federal tax outcome

Scenario	Tax	Effective rate
With QSBS exclusion	—	—
Without QSBS (LTCG only)	—	—

Federal tax savings from QSBS

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How § 1202 works

The most generous federal tax break founders get.

QSBS lets a founder exclude up to 100% of the gain on the sale of qualifying stock from federal tax. The qualifying conditions are narrow but the upside is enormous, tens of millions of tax-free gain on a successful exit.

Issuer qualifies

Domestic C corporation with $50M or less in aggregate gross assets at issuance. Active business, not service/financial/hospitality.

Original-issue acquisition

You acquired the stock directly from the corporation (not from another stockholder), for money, property, or services.

5-year holding period

You must hold the stock more than 5 years before sale. Stock acquired at original issue starts the clock at issuance.

Per-issuer cap applies

The exclusion is capped at the greater of $10M per issuer or 10× your adjusted basis. Gain above the cap is taxed at LTCG rates.

Why this matters

A clean QSBS position is worth millions. A broken one is worth zero.

The IRS does not pre-clear QSBS treatment. You only find out whether your stock qualifies when you sell, and by then, the documentation either supports your position or it doesn’t. The most common reasons founders lose QSBS treatment at exit are missing or inconsistent records: the asset test at issuance not documented, intermediate transfers that broke the original-issue chain, missing share certificate records. Run the calculator early; keep the records cleaner than you think you need to.

See Cap Tables & Financing

FAQ

Common questions

Per issuer per taxpayer. A founder selling QSBS in two different companies can use the cap twice. Spouses are typically treated as separate taxpayers for this purpose, doubling the cap on community-property planning. Trusts and family partnerships can also multiply the cap with careful planning, this is the foundation of “QSBS stacking” strategies.

If 10× your adjusted basis exceeds $10M, that’s your cap instead. For founders with low basis (typical), the $10M floor controls. For investors who paid a higher per-share price, e.g., Series A investors whose basis is millions of dollars per holder, the 10× prong can produce a cap much larger than $10M.

State conformity is mixed. California and Pennsylvania do not conform, the federal exclusion is added back at the state level. New Jersey conforms to a 50% exclusion. Most other states either fully conform or have no income tax. Confirm with state-specific tax counsel before relying on the federal-only number this calculator produces.

Each share has its own holding-period clock that starts at original issuance. Founders who add to their position through option exercises start new clocks for the new shares. The 83(b) election doesn’t affect QSBS holding period, the clock starts when the stock is actually issued, not when restrictions lapse.

The conversion can start a fresh QSBS clock from the conversion date, provided the corporation meets the $50M asset test at conversion and the other QSBS conditions are met. A common pre-financing move for LLCs that have grown beyond the early stage: convert to C-corp before the next round to lock in QSBS treatment for the existing equity holders.

Original issuance records (board resolution, share certificate, paid-in capital), proof the corporation met the asset test at issuance (a contemporaneous balance sheet), evidence of active business throughout the holding period, and a clean transfer history (no broken chain of original-issue stock). All of this is the corporate record, which is where Octelligence comes in.

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