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Everything there is to know about

Qualified Small Business Stock

Qualified Small Business Stock (QSBS) is an opportunity to exclude up to the entire gain of the sale of your start-up, closely-held business or company stock from federal taxes.

This comprehensive site covers all things QSBS from A to Z, from a basic introduction to the finer details, including special situations, every relevant IRS Private Letter Ruling and court case, and the full text of section 1202.

Qualified Small Business Stock Walnut Creek, CA  QSBSinfo

Those who sell shares of a Qualified Small Business can qualify for a substantial Capital Gain Exclusion, as follows:

A Qualified Small Business must meet all the following criteria:

  • It must be a domestic C corporation.
  • It must have had gross assets of less than $50MM assets when your shares were acquired.
  • It must not be either of the following:
    • A business whose principal asset is the skill or reputation of one or more employees, such as a law or accounting firm, medical practice, etc.
    • An excluded business, such as banking, insurance, restaurants, investing, etc.

It must pass several other technical tests. For the full list of requirements, along with more details, see Does My Company Qualify?

The Capital Gain Exclusion is the part of your sale exempt from federal taxes. To qualify, you must meet all the following criteria:

  • You must have held the shares for at least five years.
  • You must have acquired the shares after 8/10/1993.
  • You must have received the shares directly from company in exchange for services, cash or property (excluding stocks).

Those who purchased shares from a third party or on an exchange do not qualify.

How much tax will I save?

Your Capital Gain Exclusion is based upon when the shares were acquired, as follows:

Shares acquired 

before 2/17/2009:

50% exclusion

Shares acquired 

after 2/17/2009 and before 9/28/2010:

75% exclusion

Shares acquired 

after 9/27/2010:

100% exclusion

Capital Gain Exclusion Walnut Creek, CA  QSBSinfo

Your Capital Gain Exclusion is limited to a maximum of $10,000,000 or 10 times the cost basis, whichever is greater. You can claim the entire $10MM limit in one year, or spread it out over several years. If you’re fortunate enough to have more than one qualified small business, you can claim a $10,000,000 exclusion for each.

For shares acquired before 9/28/2010, however, you’ll give back some of these tax savings in the form of Alternative Minimum Taxes (AMT) and a special 28% capital gains rate. For more details, see the Tax Treatment page.

How do I know if I qualify?

If you are new to QSBS, the checklist below may be the best place to start:

-QSBS checklist

We also have numerous resources for both individuals and professionals, including:

-Case Law and IRS Private Letter Rulings

-Full Text of IRC section 1202

I think this applies to me. Now what?

The financial planning articles below can help you make the most of your opportunity:

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Special Situations

The content above encompasses the vast majority of QSBS cases. However, sometimes special situations occur. If any of the following apply to you, please refer to the Special Situations page:

  • Your QSBS shares were transferred to you
  • Section 1045 Rollovers
  • Your shares are owned by a pass-thru
  • Your company was acquired
  • Empowerment Zone