Qualified Small Business Stock (QSBS)
C-corporation stock that may qualify for up to 100% federal capital gains exclusion under IRC Section 1202.
What is QSBS?
Qualified small business stock (QSBS) refers to original-issue stock of a domestic C-corporation that meets requirements of IRC Section 1202, potentially allowing investors to exclude 50% to 100% of capital gains from federal tax when the stock is sold. To qualify, the corporation must have had gross assets of $50 million or less at issuance, be an active domestic C-corp in an eligible industry, and the investor must hold the stock for more than five years. For shares issued after September 27, 2010, the exclusion is 100%, capped at the greater of $10 million or 10× the investor's adjusted basis per issuer.
Example
An angel investor purchases $500,000 of QSBS in a tech startup in 2020. In 2026 (six-year hold), they sell for $5,000,000, realizing a $4,500,000 gain. Under Section 1202's 100% exclusion (post-2010 issuance), the entire gain is excluded from federal capital gains tax, saving approximately $900,000 at the 20% rate.
Source: IRS — IRC Section 1202