Definition
What is Section 1202 QSBS?
Section 1202 Qualified Small Business Stock (QSBS) is a US federal tax provision allowing exclusion of up to $10M (or 10× basis, whichever greater) of capital gain on sale of qualifying small business stock held 5+ years. The single biggest US startup tax benefit.
Eligibility
QSBS eligibility.
Stock must be:
- Issued by US C-Corp (LLCs don't qualify — convert first)
- Acquired by you directly from issuance (not secondary purchase)
- Held continuously for at least 5 years
- C-Corp had gross assets ≤ $50M when stock was issued
- C-Corp was 'qualified small business' — not real estate, finance, professional services, hospitality
Benefit
The benefit.
- Up to $10M per issuer OR 10× basis (whichever is greater) excluded from federal capital gains tax
- Excluded gain is also excluded from federal AMT
- Most US states follow (CA does not; NY excludes)
- On a $10M exit: ~$2.4M federal tax savings
- Multiple grants can stack — different acquisition dates = different 5-year clocks
Common pitfalls
What kills QSBS?
- Converting from S-Corp or LLC after stock issuance (resets clock)
- Stock acquired via secondary purchase (not from issuance)
- Holding less than 5 years
- Company entering disqualified business (finance, real estate)
- Gross assets exceeding $50M before your stock issuance (you can still qualify if stock was issued before)