QSBS planning for founders starts at issuance, not exit.
As of August 2026: Section 1202 may allow a noncorporate shareholder to exclude eligible federal gain on qualifying small business stock. The result depends on the stock’s acquisition date, the issuer and shareholder facts, the holding period and the law that applies to the sale.
Reviewed by Jeff Huang, CPA, MBA · Updated August 31, 2026
Current-law update
What changed for QSBS after July 4, 2025?
Federal law created a 50% exclusion after at least 3 years, 75% after at least 4 years and 100% after at least 5 years for qualifying stock acquired after July 4, 2025. The same law increased the issuer gross-assets threshold to $75 million for stock issued after July 4, 2025 and increased the per-issuer dollar limit to $15 million for stock acquired after that date, subject to the statute’s conditions and inflation adjustments beginning after 2026.
Stock acquired on or before July 4, 2025 remains under the earlier holding-period and dollar-limit framework. The applicable cohort must be identified before modeling a potential exclusion.
How do the two QSBS cohorts differ?
| Issue | Stock acquired or issued on or before July 4, 2025 | Stock acquired or issued after July 4, 2025 |
|---|---|---|
| Federal holding-period framework | Eligible gain generally requires a holding period of more than 5 years. | 50% after at least 3 years; 75% after at least 4 years; 100% after at least 5 years. |
| Per-issuer dollar limit | $10 million, reduced by prior eligible gain for the issuer, or 10 times adjusted basis if greater. | $15 million, reduced under the statutory ordering rules, or 10 times adjusted basis if greater. |
| Issuer gross-assets threshold | $50 million for stock issued on or before July 4, 2025. | $75 million for stock issued after July 4, 2025. |
The acquisition date governs the exclusion percentage and dollar limit; the issuance date governs the issuer gross-assets threshold. Stock lots can therefore require separate analysis.
Who may qualify for Section 1202?
Potential QSBS generally begins with stock of a domestic C corporation acquired at original issuance in exchange for money, qualifying property or services. The corporation must satisfy the applicable gross-assets test at issuance and meet the active-business requirements during substantially all of the shareholder’s holding period.
Certain service, financial, farming, extraction and hospitality businesses are excluded by statute. Industry classification, corporate activity and asset use require a fact-specific review.
When should a founder review potential QSBS eligibility?
- Before founder stock is issued.Confirm entity status, approvals, consideration, issuance date and the records that will establish the stock lot.
- Before a financing or SAFE conversion.Review the gross-assets test immediately before and after an issuance and preserve the supporting financial record.
- Before option exercise or restricted-stock decisions.Identify the acquisition date, vesting terms, valuation record and any separate Section 83(b) question.
- When the company redeems stock or changes its business.Evaluate whether redemptions, asset use or business activities affect the statutory requirements.
- Before a secondary sale or exit.Trace each stock lot, holding period, transfer and state-tax exposure before transaction documents are final.
What records should a founder preserve for a QSBS review?
A durable Section 1202 file should connect each stock lot to the corporation’s history. The exact request varies, but these records commonly form the starting point.
Shareholder and stock records
- Stock purchase, subscription or exercise agreements
- Board approvals and stock-ledger entries
- Proof of payment or contributed property
- Cap-table history by issuance date
- Vesting terms and Section 83(b) records
- Transfers, gifts, conversions and sale documents
Corporation and operating records
- Formation and C-corporation documents
- Historical balance sheets and tax returns
- Financing and capitalization documents
- Gross-assets support before and after issuances
- Business-activity and asset-use records
- Stock-redemption and reorganization records
California founders
Does California follow the federal QSBS exclusion?
No. The California Franchise Tax Board states that California does not conform to the federal gain exclusion and deferral under Sections 1202 and 1045. A founder who may qualify federally should model California and other state consequences separately.
Frequently asked questions about QSBS planning
When should a startup founder review QSBS eligibility?
A startup founder should review potential QSBS eligibility before the corporation issues stock and again before financings, option exercises, redemptions, business changes and a potential sale. Section 1202 depends on facts at issuance and during the holding period, so an exit-only review may find gaps that cannot be reconstructed or changed.
What records does a founder need for a Section 1202 review?
A Section 1202 review commonly starts with incorporation records, board approvals, stock agreements, payment evidence, cap-table history, financial statements, tax returns, financing documents and records of redemptions or transfers. The required evidence depends on the stock lot, issuer history and transaction.
Is QSBS treatment automatic when a startup is a C corporation?
No. C-corporation status is only one requirement. The stock’s issuance, the corporation’s gross assets, qualified business activity, shareholder history, holding period and other statutory rules must also be evaluated.
Does California follow the federal QSBS exclusion?
No. California’s Franchise Tax Board states that California does not conform to the federal gain exclusion or deferral under Sections 1202 and 1045. A California founder may therefore have different federal and California results.
Does filing a Section 83(b) election establish QSBS eligibility?
No. A Section 83(b) election and Section 1202 eligibility are separate analyses. If an 83(b) election is appropriate for transferred, substantially nonvested property, IRS Form 15620 states that the election must be filed no later than 30 days after the property transfer.
Can a company qualify merely because its assets are below the QSBS limit?
No. The gross-assets test is one requirement, not a complete eligibility test. The corporation, stock issuance, business activity, shareholder and holding-period rules must be reviewed together.
Authoritative sources
- 26 U.S.C. § 1202, current preliminary edition
- Public Law 119-21, Section 70431
- IRS Instructions for Schedule D, qualified small business stock
- IRS Section 83(b) election update and Form 15620
- California FTB Schedule D instructions
Sources were reviewed August 31, 2026. This page provides general educational information, not a Section 1202 opinion or tax advice for a specific shareholder or corporation.
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