{
  "meta": {
    "title": "The 9-Step QSBS Section 1202 Exclusion Strategy",
    "titleHtml": "The 9-step <em>QSBS</em> exclusion strategy.",
    "description": "Section 1202 Qualified Small Business Stock can exclude up to $10M or 10x basis of capital gains from federal tax. Nine eligibility steps — entity type, gross asset cap, holding period — qualify the exclusion.",
    "dek": "QSBS is the largest startup-equity tax exclusion in the IRC. Most founders and early employees never realize they qualify.",
    "datePublished": "2026-02-09",
    "dateModified": "2026-02-09",
    "section": "Tax Strategy",
    "readMinutes": 6,
    "wordCount": 800,
    "keywords": ["QSBS", "Section 1202", "qualified small business stock", "founder stock exclusion", "10 million exclusion", "startup tax", "5 year holding period", "stacking QSBS"]
  },
  "problem": {
    "headline": "Up to $10M (or more, with stacking) of capital gain can be permanent federal tax-free.",
    "price": "$10M+",
    "priceLabel": "Per-issuer QSBS exclusion limit",
    "body": "Section 1202 of the IRC allows up to 100% exclusion of capital gains on qualified small business stock held 5+ years, capped at the greater of $10 million or 10× original basis. For founders and early employees of successful startups, the exclusion can save $1.5–3.5 million of federal tax."
  },
  "indicatorsHeading": {
    "title": "The nine eligibility",
    "em": "requirements.",
    "sublede": "Each is a specific test under Section 1202. Failing any one disqualifies the exclusion. The composite is the qualification framework."
  },
  "indicators": [
    {"title": "Entity is a domestic C-corporation", "metric": "Pattern: not LLC, not partnership", "detail": "QSBS requires C-corp status. LLCs and partnerships do not qualify; many startups convert to C-corps for QSBS eligibility."},
    {"title": "Gross assets at issuance < $50M", "metric": "Threshold: pre-issuance + post-issuance", "detail": "Gross assets immediately before and immediately after stock issuance must be under $50M. This is the 'small business' threshold."},
    {"title": "Active trade or business requirement", "metric": "Threshold: 80% of assets used in QTB", "detail": "At least 80% of the corporation's assets must be used in qualified trade or business. Excludes professional services, financial, hospitality, farming, mining."},
    {"title": "Original issuance — bought from company directly", "metric": "Pattern: not secondary purchase", "detail": "QSBS must be acquired at original issuance from the corporation. Secondary purchases generally do not qualify (with limited exceptions)."},
    {"title": "5-year minimum holding period", "metric": "Threshold: 60 months", "detail": "Must hold 5+ years to qualify for full exclusion. Shorter holds receive proportional exclusion under §1045 rollover rules."},
    {"title": "Per-issuer exclusion cap", "metric": "Threshold: $10M or 10× basis", "detail": "Exclusion is greater of $10M or 10x original basis per issuer per taxpayer. Stacking via gifts to family members can multiply the cap."},
    {"title": "Acquisition date and exclusion percentage", "metric": "Pattern: 50/75/100% by date", "detail": "Stock acquired 9/27/2010 or later receives 100% exclusion. Earlier acquisitions: 50–75% exclusion."},
    {"title": "Stacking via gifts to family", "metric": "Pattern: each donee gets cap", "detail": "Gifting QSBS to family members gives each donee their own $10M cap. Multi-family stacking can exclude $50M+ of gains."},
    {"title": "1045 rollover for early exits", "metric": "Pattern: roll into new QSBS", "detail": "Sales before 5-year holding can roll proceeds into new QSBS within 60 days, preserving QSBS status and restarting the holding period."}
  ],
  "body": [
    {
      "h2": "Why QSBS is the largest startup tax break",
      "paragraphs": [
        "Section 1202 was enacted in 1993 and significantly expanded by the 2010 Small Business Jobs Act, which made the exclusion 100% for QSBS acquired after September 27, 2010. The combined exclusion can save $1.5–3.5 million of federal tax on a $10 million qualified gain (depending on capital gains rate and state tax interaction).",
        "The benefit is not just for founders. Early employees with stock granted as compensation, angel investors with original-issuance investments, and family members receiving QSBS gifts all qualify. The breadth of eligibility is much larger than typical retail awareness."
      ]
    },
    {
      "h2": "The C-corp requirement",
      "paragraphs": [
        "QSBS requires the issuing entity to be a C-corporation. Many early-stage startups operate as LLCs or partnerships for organizational simplicity. LLCs and partnerships are not eligible. The entity must convert to C-corp before stock issuance to qualify.",
        "This creates a planning dynamic. Founders who realize the QSBS opportunity early enough to incorporate as C-corp at the appropriate time capture the benefit. Founders who operate as LLCs and only convert at later financing rounds may forfeit QSBS on the early founder shares."
      ]
    },
    {
      "h2": "Stacking via gifts",
      "paragraphs": [
        "The $10 million per-issuer cap applies per taxpayer. Gifting QSBS to family members — spouse, children, parents — gives each donee their own $10M cap on the same issuer's stock. Multi-family stacking can exclude $50 million or more of gain on a single issuer's exit.",
        "The discipline is timing. Gifts must be made before exit, with proper valuation and gift-tax filings. Gifts made shortly before announced exits face IRS scrutiny under step-transaction doctrine. Strategic stacking benefits from earlier planning, ideally years before any liquidity event is contemplated."
      ]
    },
    {
      "h2": "1045 rollover for short-tenure exits",
      "paragraphs": [
        "Section 1045 allows tax-free rollover of QSBS gain into new QSBS if reinvested within 60 days. The rollover preserves QSBS status and restarts the 5-year holding clock. For early-stage investors who exit before 5 years (e.g., acquisition by another startup), the rollover keeps the QSBS pathway open.",
        "Operationally, the rollover requires direct reinvestment into qualifying QSBS within 60 days of sale. Most accredited-investor angel platforms support this. The mechanics require attention but the benefit is substantial."
      ]
    }
  ],
  "faqs": [
    {"q": "Does QSBS apply to RSUs?", "a": "Sometimes. Restricted stock units that vest into qualifying C-corp stock can qualify, with specific rules about acquisition date and §83(b) elections."},
    {"q": "Can I QSBS-qualify ISO exercises?", "a": "ISO exercises produce stock that, if otherwise qualifying, can be QSBS. The ISO exercise itself doesn't disqualify."},
    {"q": "Does the exclusion apply to state tax?", "a": "Varies by state. California, Pennsylvania, and others do not conform to QSBS. Federal-only exclusion in non-conforming states."},
    {"q": "What about secondary sales?", "a": "QSBS sold by the original holder to a third party retains QSBS status for the seller. The buyer's purchase is not at original issuance and typically doesn't qualify."},
    {"q": "Will Congress eliminate QSBS?", "a": "Periodically discussed but not seriously threatened. The exclusion is bipartisan-popular as economic-development incentive."},
    {"q": "Should I delay an exit for QSBS?", "a": "If the exit is within 12 months of the 5-year mark, often yes. The tax savings frequently exceed any deal-timing cost. Below 4 years, the §1045 rollover may be the better path."}
  ]
}