QSBS: Section 1202 Startup Stock Exclusion
Section 1202 can exclude some or all of the gain from selling qualified small business stock (QSBS) held for the required period. The rules were changed in 2025 for stock acquired after July 4, 2025, so the stock's issue date now matters more than ever.
Two sets of rules
| Feature | Stock acquired on or before July 4, 2025 | Stock acquired after July 4, 2025 |
|---|---|---|
| Holding period for exclusion | More than five years | Tiered: 50% after three years, 75% after four years, 100% after five years or more |
| Per-issuer cap | $10 million (or 10 times basis) | $15 million, reduced by prior exclusions, inflation-adjusted for tax years after 2026. The 10 times basis limit is unchanged |
| Gross asset test | $50 million | $75 million, inflation-adjusted for tax years after 2026 |
The married-filing-separately cap is one-half the applicable limit under the post-July 4, 2025 rules.
Eligibility basics
- The stock must be issued by a domestic C corporation, not an LLC or S corporation.
- The company's gross assets must be within the applicable threshold when the stock is issued.
- The company must meet an active business requirement during substantially all of the holding period.
- Certain business types, such as many service businesses, are excluded from the active business test.
- The stock generally must be acquired at original issuance, not bought on the secondary market.
Record-keeping
QSBS status is proven by records, not by assumptions. Keep stock certificates or ledger entries showing the issue date, the amount paid or property contributed, the company's gross asset position at issuance, and a record of any prior exclusions claimed. Companies should provide this information to shareholders on request, and founders should ask for it at each round.
Planning checklist
- Confirm the entity is a C corporation before stock is issued.
- Document the gross asset figure at each issuance.
- Calendar the holding period dates for each block of stock.
- Track prior exclusions to apply the per-issuer cap correctly.
- Model the exclusion against the alternative minimum tax and state tax results.
General educational information. Section 1202 has detailed eligibility, cap and record-keeping rules, and the inflation adjustments and any transition rules should be confirmed for the year of the sale. Consult a qualified CPA before relying on the exclusion.