What is qualified small business stock (QSBS)?
TaxEquityQSBSFormation
Qualified small business stock is stock in a US C corporation that meets a few conditions when it is issued, and that lets the holder exclude some or all of the gain on selling it from federal income tax. For stock issued after July 4, 2025, the exclusion is 50 percent after three years, 75 percent after four, and 100 percent after five, up to the greater of $15 million or ten times what the holder paid for the stock. For stock issued before that date the old rules apply: five years, 100 percent, and a $10 million cap. Founder stock bought at par on the day of formation is the purest example of QSBS there is, which is why the rule matters more to founders than to almost anyone else.
The conditions on the company
It must be a C corporation, not an S corporation or an LLC, at issuance and for substantially all of the holding period. Its gross assets must not have exceeded $75 million at any time before the issuance or immediately after it; the figure was $50 million for stock issued before July 5, 2025, and is indexed for inflation from 2027. And at least 80 percent of its assets must be used in an active trade or business other than the excluded ones: professional services such as law, health, accounting, consulting and financial services, banking and insurance, farming, mining, hotels and restaurants. Most software and product companies qualify. Most agencies and practices do not.
The conditions on the holder
The stock must be acquired at original issue, from the company, for money, property or services, not bought from another stockholder. Founder stock, stock bought in a round, restricted stock granted to an employee and shares received on exercising an option all count; shares bought in a secondary sale do not. The holder must not be a C corporation. Certain buybacks by the company around the time of issuance can disqualify the stock, which is a reason to have a lawyer look before the company repurchases a departing founder's shares.
Selling early, and states
A holder who sells before the holding period is up can roll the proceeds into new QSBS within 60 days and keep the clock running, provided the old stock was held at least six months. The exclusion is federal; some states follow it and some, California among them, tax the gain in full. The 83(b) election matters here too: filing it starts the holding period on the grant date rather than on each vesting date.
QSBS is a reason to form a C corporation, to issue founder stock at formation, and to file the 83(b). It is not a reason to do anything exotic; the next article is about the strategies that go further, and why most founders should not use them.
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Written by the lawyers who built Arabella. This is legal information, not legal advice for your situation, and reading it does not make us your lawyers. For a real dispute or a high-stakes decision, talk to a licensed attorney. More questions.