QSBS — Qualified Small Business Stock (IRC §1202)

Stock in a qualified C-corporation that, if held 5+ years, is eligible for federal capital-gains exclusion up to $10M or 10× basis.

What it actually means

IRC §1202 allows founders, early employees, and angel investors to exclude up to $10M (or 10 times the original basis, whichever is greater) of capital gains from federal taxation when they sell QSBS held for at least 5 years. To qualify: the stock must be C-corporation stock, the company's gross assets must have been ≤$50M when the stock was issued, the company must be in a qualified trade or business, the stock must be acquired at original issuance (not in secondary market), and held for 5+ years. For QSBS acquired after September 2010, the exclusion is 100% federal.

Distinguishing it from look-alikes

QSBS is the most under-used tax break in tech compensation. Most early employees don't realize their stock options exercise into QSBS-qualifying shares if the company is small enough at exercise. The 5-year holding period starts at exercise (not at option grant). California does NOT conform to §1202 — full state cap-gains tax (up to 13.3%) still applies on QSBS gain in CA.

Examples

Founder, $0 basis, sells $5M, held 6 years post-2010

$5M exclusion — full federal $0 cap-gains tax (state may still apply)

Angel investor, $500K basis, sells $20M, held 7 years

$10M exclusion (greater of $10M cap or 10× $500K = $5M, so $10M wins) — federal tax on remaining $9.5M gain

Early employee with ISOs exercised at $4 strike when company had $20M assets

Likely QSBS-qualifying — clock starts at exercise date, not grant date