Before you count on a tax-free exit, you need to verify that your stock actually qualifies. Section 1202 of the Internal Revenue Code offers up to $15 million in tax-free capital gains — but only if every requirement is met. Miss one, and the exclusion disappears entirely.
This checklist walks through every requirement, in order, so you can confirm QSBS eligibility before you sell — not after.
For the full analysis of each requirement, see the Complete Guide to QSBS & Section 1202.QSBS is binary: if you miss one requirement, you lose the exclusion.
Before you count on a tax-free exit, verify QSBS eligibility. Section 1202 can shelter up to $15M of capital gain—but only if the company and the shares meet every requirement.
Washington & Oregon context (important): If stock qualifies under §1202, it is generally exempt from Washington’s 9.9% income tax and Washington’s 7% capital gains tax, and Oregon ties eligibility to the §1202 rules too. The tax stakes are large.
Quick eligibility summary (all required)
- Domestic C corporation (not LLC, partnership, S corp, or foreign corp)
- Original issuance (you acquired stock from the corporation)
- Gross assets ≤ $75M before and immediately after issuance (statute)
- 80% active business test (service-business risk)
- 5-year holding period
- No problematic redemptions
Download: Free QSBS Issue-Spotting Checklist
The checklist (what to confirm)
1) Is it a domestic C corporation?
QSBS does not apply to LLCs, partnerships, S corps, or foreign corporations.
2) Did you acquire stock at original issuance?
Secondaries never qualify. You must acquire the shares from the corporation.
3) Did the corporation have $75M or less in gross assets when you acquired?
The company must be under the cap immediately before and immediately after the issuance.
4) Does the company meet the 80% “active business” test?
At least 80% of assets must be used in the active conduct of a qualified business.
5) Did you hold the stock at least five years?
Shorter holds generally don’t qualify.
6) Any redemptions?
Certain redemptions can taint eligibility.
Examples
LLC → C corp conversion QSBS eligibility is generally tied to the C corp shares you acquire after conversion, not a prior LLC interest.
Secondary purchase You buy shares from another shareholder. That is not QSBS.
Redemptions in the cap table A founder redemption near the time of issuance can disqualify QSBS for everyone.
FAQ
Does SAFE/note conversion count as original issuance? It can, depending on structure and documentation.
Does consulting revenue automatically disqualify QSBS? Not automatically, but the service-business risk is real.
What about state tax? Federal QSBS is one layer. States differ. Washington/Oregon are particularly important.
Can I sell before five years? Generally no, though special rules exist.
How much exclusion? Up to the greater of $10M or 10x basis.
Can later financing break QSBS for early shares? It can, especially around gross assets and redemptions.
Documents to gather
- Incorporation + conversions
- Cap table
- Stock issuance docs
- Financials around issuance
- Redemption records
For a deeper dive, see the Complete Guide to QSBS & Section 1202.
1. Entity Requirement: Is It a C Corporation?
☐ The issuing company is a domestic C corporation (not an S-corp, LLC, partnership, or foreign entity)
☐ The company was a C corporation at the time the stock was issued
☐ The company has not elected S-corp status at any point during your holding period
Why this matters: LLCs and S-corps cannot issue QSBS. If your company started as an LLC and converted to a C-corp, only stock issued after the conversion qualifies. This is the single most common reason stock fails to qualify.
2. Gross Asset Test: Was the Company Small Enough?
☐ At the time your stock was issued, the corporation’s aggregate gross assets were $75 million or less (post-OBBBA; $50 million for pre-July 4, 2025 stock)
☐ Gross assets include cash plus the adjusted basis of all property held by the corporation
☐ You have documentation of the company’s asset level at the time of issuance
Why this matters: The test is applied at the moment of issuance. A company can grow far beyond $75 million after your stock is issued and you still qualify. But if the company was at $76 million when your shares were issued, those shares are permanently disqualified.
3. Original Issuance: Did You Get the Stock Directly from the Company?
☐ You acquired the stock directly from the corporation (not purchased from another shareholder on the secondary market)
☐ You acquired it in exchange for money, property, or services
☐ If acquired for services, you were an employee, director, or contractor of the company
Why this matters: Stock bought on the secondary market does not qualify, no matter how long you hold it.
4. Active Business Requirement
☐ During substantially all of your holding period, at least 80% of the company’s assets were used in the active conduct of a qualified trade or business
☐ The company is not in an excluded industry (see list below)
☐ No more than 10% of the company’s assets were held in passive investments (stocks, bonds, real estate held for investment)
Excluded Industries (QSBS Does NOT Qualify)
✘ Professional services: law, medicine, accounting, consulting, engineering, financial services, architecture
✘ Banking, insurance, or lending
✘ Farming or mining
✘ Hotels, motels, or restaurants
✘ Any business where the principal asset is the reputation or skill of employees
Most technology, SaaS, manufacturing, e-commerce, and retail businesses qualify. The excluded industry list is broader than many people realize — a software company that also does consulting may not qualify depending on the revenue mix.
5. Holding Period
☐ For 100% exclusion: held for 5+ years (post-OBBBA stock issued after July 4, 2025)
☐ For 75% exclusion: held for 4+ years
☐ For 50% exclusion: held for 3+ years
☐ For pre-OBBBA stock (issued before July 4, 2025): held for 5+ years for 100% exclusion
☐ You know your exact acquisition date and can document it
If you need to sell before reaching 5 years, see Section 1045 Rollovers: How to Defer QSBS Gains.
6. Gain Cap
☐ Your gain does not exceed the greater of: $15 million per issuer (post-OBBBA) or 10x your adjusted basis in the stock
☐ For pre-OBBBA stock: the cap is $10 million or 10x basis
☐ If your gain exceeds the cap, you have considered stacking strategies
For strategies to multiply the exclusion beyond $15 million, see QSBS Stacking: How to Multiply the Exclusion with Trusts and Family Gifts.
7. Redemption Test
☐ The company has not redeemed stock from you or a related person in the 2 years before or after your stock issuance in a transaction that significantly reduced your percentage ownership
☐ The company has not redeemed more than 5% of its stock in aggregate during the 1 year before or after your issuance
Why this matters: Excessive stock buybacks can disqualify QSBS.
8. Documentation Checklist
Keep these records throughout your holding period:
☐ Stock purchase agreement or grant documentation showing original issuance
☐ Board resolutions approving the stock issuance
☐ Company financial statements showing gross assets at time of issuance
☐ Records showing the company met the active business requirement throughout your holding period
☐ Evidence that no more than 10% of assets were in passive investments
☐ 83(b) election filing confirmation (if restricted stock)
☐ 409A valuation at time of issuance (if applicable)
☐ Records of any stock redemptions by the company
The IRS can challenge QSBS claims years after a sale. Contemporaneous documentation is your best defense.
Washington State Bonus
If your stock qualifies as QSBS under Section 1202, the excluded gain is also exempt from Washington’s 7% capital gains tax and the new 9.9% income tax (ESSB 6346, effective 2028). The Washington legislature considered decoupling from the federal exclusion (SB 6229/HB 2292) but those bills did not pass.
For comprehensive WA tax planning strategies, see the Washington State Income Tax Planning Guide.
Questions about whether your stock qualifies? Book a 20-minute intro call.
Get the complete QSBS analysis: The Complete Guide to QSBS & Section 1202.
