What is qualified small business stock?

The “qualified small business stock” (QSBS) tax exemption under Section 1202of the Internal Revenue Code (IRC) allows non-corporate founders and investors in certain emerging growth companies to potentially exclude up to 100 percent of the U.S. federal capital gains tax incurred when selling holdings in start-ups or small businesses. IRC Section 1202(a) permits a stockholder to exclude a percentage of the gain recognized on the sale of QSBS held for at least three years, capped at the greater of $10 million ($15 million for stock issued after July 4, 2025, indexed for inflation) or 10 times the basis of its initial investment. Alternatively, if QSBS has been held for at least six months, IRC Section 1045 generally permits a tax-free rollover of gain on the sale of the QSBS if the proceeds are reinvested within 60 days of the sale of the QSBS. These provisions are intended to encourage formation of, and investment in, certain small, active, operating businesses.

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