What QSBS Is and Why Founders Should Know About It Years Before an Exit
Sam's List Editorial | 2026-06-23
What QSBS Is and Why Founders Should Know About It Years Before an Exit The single largest tax break available to most founders is the one almost no founder hears about until it's too late to set up. Qualified small business stock — QSBS — under Section 1202 of the Internal Revenue Code allows founders and early shareholders of qualifying C-corporations to exclude a substantial portion of capital gain on the sale of their stock from federal tax. For stock issued after July 4, 2025, the exclusion can cover the greater of $15 million per shareholder or 10× the original basis; for stock issued on or before that date, the old $10 million floor applies. The catch is the holding period — and the structural requirements that have to be in place from the moment the stock is issued. By the time most founders learn about QSBS, the clock has already run wrong or the entity is the wrong shape. This piece is a plain-English explainer of what QSBS is, what qualifies, and what founders should be doing about it before they're anywhere near an exit. What the exclusion actually covers Under IRC §1202, eligible gain from the sale of qualified small business stock is excluded from federal income tax once the stock has been held long enough. How much is excluded — and how long the stock must be held — depends on when the stock was issued. The One Big Beautiful Bill Act (OBBBA), enacted in July 2025, drew a hard line at July 4, 2025 , and the two regimes are different enough that the issuance date is the first thing a founder needs to nail down. Stock issued on or before July 4, 2025 (the legacy rules): the stock must be held more than five years, and the exclusion percentage depends on the original acquisition date: Acquired before February 18, 2009: 50% excluded. Acquired between February 18, 2009 and September 27, 2010: 75% excluded. Acquired after September 27, 2010 (through July 4, 2025): 100% excluded. Stock issued in this window keeps the legacy framework no matter when it is sold — there is no grandfather provision letting it opt into the new rules. Stock issued after July 4, 2025 (the OBBBA rules): the holding period is now tiered. Hold at least three years for a 50% exclusion, four years for 75%, and five years for the full 100%. The single five-year cliff for any exclusion at all is gone for newly issued stock. In both regimes, the excluded gain is also exempt from the 3.8% net investment income tax. The per-shareholder limit is the greater of a dollar cap or 10× the shareholder's aggregate adjusted basis in the QSBS of that issuer. The dollar cap also turns on...
