Introduction
Qualified Small Business Stock (QSBS) refers to shares of a U.S. C corporation that qualify for the powerful tax exclusion under Section 1202 of the Internal Revenue Code. If you receive stock at original issuance from a qualified corporation, hold it for more than five years and the company’s gross assets were below $75 million when the shares were issued, you may exclude up to $15 million (or 10× your investment) of capital gain when you sell. Recent changes increased the cap and introduced partial exclusions after three and four years, but the rules remain strict: the company must be a C corporation (not an LLC or S corp), at least 80 % of its assets must be used in an active business, and the stock must be issued for money, property or services. Choosing the wrong entity or making certain redemptions can permanently disqualify QSBS benefits.
Section 1045 allows a deferral of tax on QSBS that has been held for more than six months but less than five years by rolling the proceeds into replacement QSBS within 60 days. This lets you preserve the five-year holding period and still take advantage of Section 1202 later.
Key articles
- Qualified Small Business Stock (QSBS): What Founders, Investors, Contractors, and Employees Need to Know — Read the article for a comprehensive overview of QSBS eligibility, the $15 million exclusion, and common pitfalls.
- Only C-Corps Can Issue QSBS — and That’s a $15 Million Reason to Care — Learn why entity choice matters and how starting as an LLC or S corp can forfeit the QSBS exclusion.
- Washington’s Capital Gains Tax and QSBS: Why Excluded Gain Isn’t Taxed — Understand how Washington’s capital gains tax interacts with QSBS and why Section 1202-excluded QSBS gain is also excluded at the state level.
- Does Washington’s Capital Gains Tax Apply to QSBS Gains? — Find answers to common questions about the tiered rate structure and QSBS documentation.
If you are considering issuing QSBS or investing in a startup and want to maximize the tax benefits, please reach out. We regularly advise founders, investors and employees on QSBS structuring, Section 1045 rollovers and other tax-efficient strategies.
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- Schedule a consultation — Book a time on our calendar to discuss your specific situation.
- Contact us — Reach us directly at our contact page with your questions.
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