QSBS Rules After the 2025 Tax Law Changes: The Complete 2026 Guide to Section 1202

The QSBS rules changed more in 2025 than they had in the previous fifteen years. If an article says the QSBS gross asset limit is always $75 million or the exclusion cap is always $15 million without asking when the stock was issued and acquired, that guidance may be wrong for many shareholders.

For most founders, employees, and investors who acquire their shares directly from the company, the issuance date and acquisition date are the same. In these situations, stock issued and acquired on or before July 4, 2025 generally remains subject to the legacy Section 1202 framework, while stock issued and acquired after July 4, 2025 may qualify under the new rules introduced by the One Big Beautiful Bill Act (OBBBA).

If the stock was issued and acquired...	Rules that generally apply
On or before July 4, 2025	Legacy Section 1202 rules
After July 4, 2025	New OBBBA Section 1202 rules

The difference matters because different parts of Section 1202 use different dates. The corporation’s applicable gross asset threshold generally depends on when the stock was issued. The shareholder’s exclusion cap and available holding-period percentage generally depend on when the taxpayer acquired the stock.

In a standard transaction, these dates will usually match. However, special acquisition-date and holding-period rules may apply to stock received through gifts, inheritances, partnerships, tax-free exchanges, or Section 1045 rollovers. Shareholders in these situations should not assume that the date shown on the original stock certificate determines every aspect of their QSBS treatment.

The main question for most shareholders is therefore: Was the stock both issued by the company and acquired by the taxpayer on or before July 4, 2025, or after that date?

Answering that question sets the starting point for determining the applicable gross asset limit, exclusion cap, and minimum holding period. It does not, by itself, establish that the stock qualifies as QSBS. The company and shareholder must also satisfy the original-issuance requirement, active business requirement, corporate-status rules, and the other conditions under Internal Revenue Code Section 1202.

Key Takeaways

• For most founders, employees, and investors, the applicable QSBS rules depend on when the stock was issued and acquired. For directly issued shares, these dates are usually the same, although special transfer and carryover rules can create exceptions.
• The QSBS gross asset threshold is $50 million for stock issued on or before July 4, 2025, and $75 million for qualifying stock issued after that date. The new threshold is scheduled to be adjusted for inflation beginning in 2027.
• The per-issuer exclusion cap is generally the greater of $10 million or 10 times basis for stock acquired on or before July 4, 2025. For stock acquired after that date, the cap generally increases to $15 million, although coordination rules may apply if you own stock acquired under both regimes.
• Legacy stock generally requires a holding period of more than five years. Newly acquired stock may qualify for a 50% exclusion after three years, a 75% exclusion after four years, and a 100% exclusion after five years.
• The partial exclusions may create Alternative Minimum Tax consequences. At the three- and four-year tiers, 7% of the excluded gain is treated as an AMT preference item.
• QSBS is a federal tax benefit. Some states, including California, do not fully conform to the federal exclusion, so a federally excluded gain may still be taxable at the state level.
• Contemporaneous documentation is critical. A QSBS Eligibility Attestation prepared near the time of issuance can help document the company’s Section 1202 eligibility, including the gross asset test, qualifying business activities, corporate status, and relevant issuance details.

What is Qualified Small Business Stock (QSBS)?

Qualified Small Business Stock (QSBS) is stock issued by an eligible U.S. C corporation that may qualify for the federal capital gains exclusion under Internal Revenue Code Section 1202, provided the statutory requirements are met. For eligible founders and investors, QSBS can exclude a substantial portion, and in many cases all, of the capital gain realized when the stock is sold, making it one of the most valuable tax incentives available to startup shareholders.

Section 1202 has been part of the Internal Revenue Code since 1993, but its rules have evolved through several legislative changes. The most significant recent update came with the One Big Beautiful Bill Act (OBBBA), signed into law on July 4, 2025. The legislation introduced a higher gross asset threshold, increased the maximum exclusion amount, and created partial capital gains exclusions for qualifying stock held for three or four years, while preserving the legacy rules for stock issued on or before July 4, 2025.

Legacy Section 1202 vs. OBBBA Section 1202

This table provides a high-level comparison of the rules that generally apply to legacy and post-OBBBA QSBS.

	Legacy Section 1202	OBBBA Section 1202
Gross asset threshold applies to	Stock issued on or before July 4, 2025	Stock issued after July 4, 2025
Exclusion cap and holding-period rules apply to	Stock acquired on or before July 4, 2025	Stock acquired after July 4, 2025
Company gross asset threshold	$50 million	$75 million, adjusted for inflation beginning in 2027
Per-issuer exclusion cap	Greater of $10 million or 10 times basis	Greater of $15 million or 10 times basis, with the dollar limit adjusted for inflation beginning in 2027
Holding period for full exclusion	More than five years	Five years for a 100% exclusion
Partial exclusion for shorter holding periods	None	50% after three years and 75% after four years
AMT treatment	Generally no QSBS AMT preference for stock acquired after September 27, 2010; older stock may be treated differently	At the three- and four-year tiers, 7% of the excluded gain is treated as an AMT preference item

How the QSBS Exclusion Caps Coordinate

If you hold both legacy and post-OBBBA QSBS issued by the same corporation, the $10 million and 15 million limits do not operate as two completely separate exclusions that can be added together.

Section 1202 contains coordination rules that may reduce the dollar limit available for post-OBBBA stock by eligible gain attributable to legacy stock from the same corporation. The amount available can therefore depend on the shareholder’s prior exclusions, the stock being sold, and the timing and structure of the dispositions.

If your company issued stock both before and after July 4, 2025, the cap table may contain shares governed by two different QSBS regimes. Each block of stock should be tracked separately, but the applicable exclusion limits must also be coordinated when calculating the shareholder’s total available benefit.

What Is the QSBS Gross Asset Test?

The QSBS gross asset test determines whether a corporation qualifies as a Qualified Small Business under Internal Revenue Code Section 1202. The threshold depends on when the stock was issued. Stock issued on or before July 4, 2025 is subject to the $50 million gross asset limit, while stock issued after that date follows the new $75 million limit introduced by the One Big Beautiful Bill Act (OBBBA). The $75 million threshold will be adjusted for inflation beginning in 2027.

To qualify, the corporation’s aggregate gross assets must not have exceeded the applicable threshold at any time before the issuance, generally measured from August 10, 1993, and must not exceed the threshold immediately after the issuance, including the cash or property received in exchange for the stock.

Stock issuance date	Gross asset limit
On or before July 4, 2025	$50 million
After July 4, 2025	$75 million (inflation-adjusted beginning in 2027)

Because the gross asset test applies separately to each stock issuance, the same company may have different issuances or blocks of stock subject to different QSBS thresholds. For example, shares issued in March 2025 must satisfy the $50 million gross asset test, while shares issued after July 4, 2025 may qualify under the $75 million threshold.

Both issuances can qualify as QSBS, but each is evaluated under the rules that applied on its issuance date.

Passing the gross asset test at issuance is only one part of QSBS eligibility. During the shareholder’s holding period, the company must also satisfy the active business requirement, meaning at least 80% of the value of its assets must be used in the active conduct of one or more qualified trades or businesses.

Because the gross asset test is measured at the time stock is issued, many companies choose to document their eligibility contemporaneously. Maintaining records of the company’s gross assets and business activities at issuance can make it significantly easier to support a future QSBS claim.

The Exclusion Cap and Coordination Rules

• Older stock: greater of $10 million or 10x your basis, per company, per person.
• Newer stock: greater of $15 million or 10x your basis, per company, per person, rising with inflation after 2026.

If you hold both legacy and post-OBBBA QSBS issued by the same corporation, the applicable dollar limits must be coordinated rather than simply added together. Prior exclusions and gain attributable to legacy stock may reduce the dollar limit available for post-OBBBA stock. The composition and timing of the dispositions can materially affect the available exclusion, so the transaction should be modeled before the sale.

Holding Period: 3 Years, 4 Years, or 5 Years?

If your shares were acquired on or before July 4, 2025, the legacy holding-period requirement generally applies:

• Held for more than 5 years: potentially eligible for the full exclusion
• Held for 5 years or less: no Section 1202 exclusion under the legacy rules

Stock acquired after July 4, 2025 may qualify under the new sliding scale:

Time held	Exclusion	AMT add-back
Under 3 years	0%	—
3–4 years	50%	7% of the excluded gain
4–5 years	75%	7% of the excluded gain
5+ years	100%	None

The new tiers reduce the impact of the legacy five-year cliff, under which selling before the required holding period could result in no Section 1202 exclusion. However, the partial tiers may still create AMT consequences, so a three- or four-year disposition should not automatically be treated as tax-free.

Does Your State Even Recognize QSBS?

This is the part most guides skip, and it changes how much this benefit is actually worth to you. QSBS is a federal rule. States don’t have to follow it, and a few don’t.

Conformity status	States
No conformity, full state tax still applies	California, Alabama, Mississippi, New Jersey, Pennsylvania
Partial conformity	Hawaii, Massachusetts
Generally conforms	Most other states

State conformity rules change frequently through legislative and judicial developments. Always verify the current rules in the applicable state before relying on the federal QSBS exclusion for state tax planning.

If you’re in California, the federal exclusion does not lower your California tax bill. California’s own capital gains rate still applies in full, separate from anything the federal government excludes. People sometimes plan around this with residency changes or trusts set up in a conforming state, but that’s a real legal and tax decision, not something to try on your own.

Basic Eligibility Rules (Apply to All QSBS)

A few things stay the same no matter when the stock was issued:

• The company has to be a domestic C corporation at issuance and generally remain one throughout your holding period.
• You must acquire the stock directly from the company in exchange for money, services, or property. Stock purchased from another shareholder on the secondary market generally does not qualify.
• The company’s aggregate gross assets must not have exceeded the applicable threshold before the issuance and must remain within the threshold immediately after the issuance, including the proceeds received.
• At least 80% of the company’s assets must be used in an active qualified trade or business.
• The company cannot primarily operate in one of the excluded industries, including:
  • Professional services (law, accounting, consulting, actuarial services)
  • Financial services, banking, insurance, financing, leasing, and brokerage
  • Farming and forestry
  • Mining, oil, and gas businesses eligible for percentage depletion
  • Hotels, motels, and restaurants
  • Businesses where the principal asset is the reputation or skill of one or more employees or owners
• The company must also comply with limits on passive assets. Generally, more than 10% of net asset value cannot consist of portfolio stock or securities, and more than 10% of total asset value cannot consist of real property that is not used in the active conduct of the business.
• Certain stock redemptions occurring during the Section 1202 statutory testing periods may disqualify otherwise eligible QSBS. Because the redemption rules are highly technical, companies should review significant share repurchases with qualified tax advisors before proceeding.

How Do SAFEs and Convertible Notes Affect QSBS?

A SAFE or convertible note generally is not stock for purposes of Section 1202. Instead, it represents a contractual or debt-based right that may later convert into stock. As a result, merely signing or funding a SAFE or convertible note does not ordinarily establish that the investor holds QSBS.

The QSBS analysis generally begins when the instrument converts and the corporation issues actual stock. At that point, the shares must satisfy the original-issuance requirement, the applicable gross asset test, and the other conditions under Section 1202.

This distinction can affect the shareholder’s holding period. For example, if an investor funds a SAFE in 2023 but receives stock when it converts in 2025, the QSBS holding period generally begins when the qualifying stock is issued, not when the SAFE was funded.

The conversion date may also determine which gross asset threshold applies. A note signed before July 4, 2025 but converted into stock after that date may be tested under the rules applicable when the stock is actually issued. However, the result can depend on the terms of the instrument, the conversion structure, and other tax rules.

Investors should therefore preserve both the original SAFE or note documents and the conversion records, including the date and terms under which the stock was issued. Because instrument structures vary, companies and investors should obtain transaction-specific tax advice rather than assuming that every SAFE or note receives the same treatment.

Why Valuations and Documentation Matter for QSBS

QSBS eligibility depends on facts that may later become difficult to reconstruct, including the company’s aggregate gross assets at issuance, capitalization, corporate status, stock issuance history, and use of assets in a qualified trade or business.

Financial statements, bank records, tax returns, capitalization records, financing documents, and transaction-specific valuation analyses can all help establish these facts. Valuation analysis may be particularly relevant for contributed property, which is subject to a special fair market value rule under Section 1202, and for other non-cash assets requiring careful basis and classification analysis.

However, a company’s enterprise value, equity value, or most recent financing valuation is not automatically the same as its aggregate gross assets for purposes of Section 1202. The QSBS gross asset test is a separate statutory calculation and should be documented accordingly.

Timing is critical. Documentation prepared at or near the relevant stock issuance generally provides a clearer record than materials reconstructed years later from incomplete bank statements, cap table records, and financing files. Waiting until an acquisition, IPO, or secondary sale to investigate QSBS eligibility can make the factual analysis significantly more difficult.

Does a 409A Valuation Determine QSBS Eligibility?

No. A 409A valuation does not determine whether stock qualifies as QSBS under Section 1202.

A 409A valuation determines the fair market value of a private company’s common stock for equity compensation purposes. QSBS eligibility depends on separate statutory requirements, including the original-issuance rule, aggregate gross asset test, active business requirement, corporate status, and holding period.

However, the financial records and capitalization analysis used during a 409A valuation may provide useful supporting evidence when documenting the company’s assets, ownership structure, and stock issuances.

A company’s 409A common stock value, equity value, or enterprise value should not be used as a substitute for the Section 1202 aggregate gross asset test.

What Can Prevent Stock From Qualifying as QSBS?

Trigger	What it looks like
Gross asset test failed	The company's gross assets went over $50M (older stock) or $75M at issuance.
Active business test fails	The corporation fails to use at least 80% of the value of its assets in the active conduct of one or more qualified trades or businesses during the applicable period.
Passive holdings pile up	The corporation exceeds the applicable limits for portfolio stock or securities, or holds excessive real property that is not used in the active conduct of the qualified business.
Disqualifying stock redemptions	Certain repurchases from the taxpayer, related persons, or other shareholders occur during the Section 1202 testing periods and exceed the applicable de minimis limits.
Acquired from another shareholder	The shares came from another shareholder, not directly from the company.
Entity type changes	The company stopped being a domestic C corporation.

QSBS Strategies for Founders

• Consider forming as a C corporation early if QSBS eligibility is an important part of your long-term tax planning. Equity or ownership interests issued before a conversion from another entity type are not themselves QSBS, although qualifying stock issued in connection with or after the conversion may potentially qualify.
• Consider whether a timely Section 83(b) election is appropriate for restricted stock. When available and properly filed, it may affect when the relevant tax and holding periods begin. Because the election is generally irrevocable and time-sensitive, obtain tax advice before filing.
• Keep clean records of issue dates. If you’ve raised money before and after July 4, 2025, you need to know exactly which shares fall under which rules.
• Check your asset totals against the right ceiling before each new round, the number depends on the issue date, not a single lifetime figure.
• Get an attestation at each major round, not just once. Your asset mix and business activity can shift.
• Gifting qualifying stock may allow eligible recipients to apply their own Section 1202 exclusion limits, while generally preserving certain carryover attributes. However, gift tax, assignment-of-income, estate-planning, and transaction-timing rules can materially affect the result.

QSBS Strategies for Investors

• Buy directly from the company, never on a secondary market, and keep the paperwork that proves it.
• Check eligibility yourself. Verify the C corporation status, the asset test at issuance, and the business activity.
• Track issue dates across your whole portfolio so you know which cap and which holding period rule applies to each position.
• Plan the timing and composition of a sale carefully if you hold both legacy and post-OBBBA QSBS issued by the same company, because the applicable exclusion limits must be coordinated.
• Use 1045 rollovers carefully. The rollover may preserve relevant holding-period and basis attributes, but its interaction with the legacy and post-OBBBA exclusion limits requires transaction-specific analysis.
• Be careful with partnership and fund structures. QSBS benefits may pass through certain partnerships and S corporations if the requirements under Section 1202 are met, but the rules are complex and depend on the ownership structure. Obtain tax advice specific to your investment before relying on the exclusion.

Example: Estimating Potential Tax Savings

These illustrations assume full eligibility and an illustrative combined tax rate of approximately 37%. They are intended only to demonstrate the potential magnitude of the exclusion.

Situation	Basis	Gain	Cap that applies	Excluded	Rough tax saved
Older stock, held 5+ years	$1M	$9M	$10M	$9M	~$3.3M
Newer stock, held 5+ years	$1M	$18M	$15M	$15M	~$5.6M
Newer stock, held 3–4 years	$2M	$20M	$15M cap, 50% tier	$7.5M (before the 7% AMT add-back)	Approximately $2.78 million before any AMT effect

Illustrative examples only. Actual tax savings depend on the taxpayer’s federal tax rate, Net Investment Income Tax (NIIT), Alternative Minimum Tax (AMT), state tax treatment, and individual circumstances.

How to Report a QSBS Exclusion

Reporting a QSBS exclusion depends on the transaction and the taxpayer’s individual circumstances. While most taxpayers will report the sale on Form 8949 and Schedule D, additional forms or supporting records may be required depending on the type of transaction.

Common tax forms and reporting documents include:

• Form 8949 and Schedule D to report the sale of QSBS and any gain excluded under Section 1202.
• Form 6251, if an AMT preference applies, including where required for an eligible post-OBBBA partial exclusion.
• Form 8960, if any non-excluded gain may be subject to Net Investment Income Tax (NIIT).
• Schedule K-1, when QSBS gain passes through a partnership, S corporation, estate, or trust.
• Brokerage or transaction documents, such as Form 1099-B or Form 1099-CAP, when applicable.
• Section 1045 rollover reporting, if you elect to defer gain by reinvesting in replacement QSBS. The required reporting depends on the transaction and should be completed in accordance with the applicable IRS reporting procedures.

Supporting Documentation

Tax reporting is only one part of claiming a QSBS exclusion. It’s equally important to maintain documentation supporting the company’s eligibility under Section 1202. While these records are generally not filed with your tax return, they may become essential if the IRS ever examines your QSBS position.

Supporting documentation may include:

• Stock issuance records and capitalization documents.
• Evidence that the company satisfied the applicable gross asset test at the time the stock was issued.
• Documentation demonstrating that the company met the active business requirement.
• Corporate records confirming the company’s C corporation status.
• Financing and capitalization records supporting the stock issuance.
• A QSBS Eligibility Attestation prepared by a qualified valuation professional documenting the company’s Section 1202 eligibility at the time of issuance, including the gross asset test, qualifying business activities, and other relevant facts.

Documentation is most valuable when it’s prepared contemporaneously rather than reconstructed years later. If a QSBS claim is ever reviewed, records created at or near the issuance date generally provide much stronger evidence than documentation assembled immediately before an exit or liquidity event.

Because reporting requirements can vary based on the type of shareholder, transaction structure, and ownership history, taxpayers should consult their tax advisor regarding the forms and elections applicable to their specific situation.

QSBS FAQs

Can an LLC Issue QSBS?

No. QSBS must be stock in a domestic C corporation. An LLC interest is not stock and therefore cannot itself qualify as QSBS. If an LLC converts into a C corporation, stock issued in connection with or after the conversion may potentially qualify, subject to the applicable Section 1202 requirements and special rules governing transferred property. The LLC interests held before the conversion are not themselves QSBS.

Does Incorporating in Delaware Automatically Qualify a Company for QSBS?

No. QSBS eligibility has nothing to do with the state of incorporation. Section 1202 requires a domestic C corporation, not just a Delaware corporation. Companies often incorporate in Delaware for governance and investor-familiarity reasons, but doing so doesn’t substitute for meeting the gross asset test, active business requirement, or the other Section 1202 conditions.

Can Employees Qualify for the QSBS Exclusion?

Yes. Employees may qualify if they acquire eligible stock directly from the company as compensation for services and satisfy the other Section 1202 requirements. For a standard stock option, the QSBS holding period generally begins when the option is exercised and stock is issued, not when the option is granted. For restricted stock, a timely Section 83(b) election may affect when the tax and holding periods begin. Employees should obtain tax advice regarding the interaction between Section 83, option exercise, vesting, and Section 1202.

Can Venture Capital Funds Claim QSBS?

A venture capital fund organized as a partnership may pass eligible Section 1202 gain through to qualifying partners. Generally, the partner must have held an interest in the partnership when the partnership acquired the QSBS and continuously through the disposition, and the exclusion is subject to statutory limitations. Because fund structures, transfers of partnership interests, carried interest, and blocker entities can affect the result, fund-specific tax advice is essential.

What Happens If the Company Exceeds the QSBS Asset Threshold After Stock Is Issued?

Exceeding the applicable gross asset threshold after a qualifying stock issuance generally does not, by itself, retroactively disqualify that stock. However, stock issued after the company exceeds the threshold may not qualify, and previously issued stock remains subject to the active business, C corporation, redemption, and other ongoing Section 1202 requirements.

What Is the QSBS Exclusion Amount in 2026?

It generally depends on when the taxpayer acquired the stock. For stock acquired on or before July 4, 2025, the per-issuer dollar cap is generally the greater of $10 million or 10 times the basis. For stock acquired after July 4, 2025, the cap generally increases to the greater of $15 million or 10 times the basis, with the dollar amount adjusted for inflation beginning in 2027. Coordination rules may apply when a taxpayer holds stock from both periods.

What Is the QSBS Asset Threshold: $50 Million or $75 Million?

Both exist simultaneously. The $50 million gross asset ceiling applies to stock issued on or before July 4, 2025. The $75 million ceiling applies to stock issued after that date. The applicable threshold is evaluated in connection with each issuance, including the corporation’s historical gross asset position and its aggregate gross assets immediately after that issuance.

Do I need to hold QSBS for 5 years to get any benefit?

Not necessarily; if your stock was acquired after July 4, 2025, you can get a 50% exclusion at 3 years and 75% at 4 years. If your stock was acquired on or before July 4, 2025, the current rule still applies: no exclusion below 5 years.

Does California recognize the QSBS exclusion?

No. California does not conform to the federal QSBS exclusion, meaning gains that are fully excluded federally can still be fully taxable at the state level.

Can I roll pre-OBBBA QSBS into the new $15 million cap using a Section 1045 rollover?

A Section 1045 rollover does not automatically convert legacy QSBS into stock eligible for the full post-OBBBA $15 million limit. The applicable treatment depends on the original stock, replacement shares, carryover rules, and the statutory coordination provisions. Taxpayers should obtain transaction-specific advice before relying on a rollover to increase the available exclusion.

Is there an AMT cost to the new partial QSBS exclusions?

Yes, for post-OBBBA stock sold at the 3-year (50%) or 4-year (75%) tiers, 7% of the excluded gain is added back as an AMT preference item. The 5-year, 100% exclusion tier has no AMT add-back.

What disqualifies a company from QSBS treatment?

Exceeding the applicable gross asset ceiling at issuance, falling below the 80% active-business-use test, operating in a disqualified industry, holding excess securities or real estate, or improper share redemptions near issuance.

How do I claim QSBS on my tax return?

Most individual taxpayers report a QSBS sale and Section 1202 exclusion on Form 8949 and Schedule D. Additional reporting may apply for an AMT preference, pass-through gain, or Section 1045 rollover. Supporting documentation, including stock records, gross asset evidence, and a contemporaneous QSBS Eligibility Attestation, is generally retained with the taxpayer’s records rather than filed as an IRS form. Taxpayers should confirm the applicable reporting procedures with their tax advisor.

Don’t Wait Until an Exit to Verify QSBS Eligibility

Most companies only start gathering QSBS documentation when an acquisition, IPO, or secondary sale is already underway.

By then, reconstructing historical capitalization records, asset values, and business activities can be difficult and sometimes impossible.

Eqvista helps founders document their Section 1202 eligibility while the information is still current through a QSBS Eligibility Attestation prepared by our valuation team.

Whether you’re issuing founder shares, raising your first financing round, or preparing for a future liquidity event, documenting eligibility early can make future tax planning significantly easier.