What Is QSBS? Section 1202 Stock, Eligibility, And Attestation

QSBS stock is not a special share class you buy. What makes shares QSBS is the set of facts on the day the company issued them to you, plus what the company does while you hold them.

That is why founders, early employees, and angel investors in startup C corporations are the usual holders. It is also why the answer can differ for two people in the same company: shares bought from a departing cofounder fail the original issue test, while shares the company issued to you in the same year may pass.

The One Big Beautiful Bill Act (OBBBA), signed July 4, 2025, is the biggest expansion of Section 1202 since 2010. The new rules apply only to stock acquired after the enactment date. Stock issued on or before July 4, 2025 stays under the classic rules, so many founders now hold a mix of old-rule and new-rule shares.

The tiered exclusion is the practical headline. Under the old rules, selling at year 4 meant zero exclusion. For new-rule stock, a founder who sells at year 3 excludes 50% of the gain and one who sells at year 4 excludes 75%, which changes how you negotiate exit timing. On a $10 million gain, a year-4 sale of new-rule stock shields $7.5 million from federal capital gains tax instead of nothing.

QSBS eligibility is a set of pass-or-fail tests. The table below is the short version; the checklist after it goes test by test.

A share is eligible only if every line below is true. One miss usually means no exclusion on that block of stock, so run the list block by block, not company by company.

• You are not a C corporation. The exclusion is written for taxpayers other than corporations. Gain through a partnership or S corporation can pass through if you held your interest when the entity bought the stock.
• The issuer was a domestic C corporation at issuance. LLC units taxed as a partnership and S corporation stock are not QSBS. An LLC that converts to a C corporation can issue QSBS from the conversion date, and the clock starts then.
• You got the shares at original issue. From the company itself, for money, property other than stock, or as pay for services. Shares bought from another shareholder fail this test.
• Gross assets stayed under the limit. $50 million for stock issued on or before July 4, 2025, $75 million for stock issued after it, at all times before issuance and immediately after it, counting the money raised in that round.
• The company passes the active business test. At least 80% of assets by value used in a qualified trade or business during substantially all of your holding period. Research and start-up activity can count.
• The business is not in an excluded field. Out: health, law, engineering, architecture, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage, banking, insurance, financing, leasing, investing, farming, natural resource extraction, hotels, motels, restaurants, and any business whose main asset is the reputation or skill of its employees.
• No disqualifying redemptions. A buyback from you or a related person in the 4-year window around your issuance, or company-wide buybacks above 5% of stock value in the 2-year window, can disqualify the shares.
• You met the holding period. More than 5 years for stock acquired on or before July 4, 2025. At least 3 years for a 50% exclusion, 4 for 75%, and 5 for 100% on stock acquired after it. The acquisition date is the first day of your holding period under Section 1223.
• You know your cap. The greater of $10 million (or $15 million for stock acquired after July 4, 2025) or 10 times your basis in the shares sold, per issuer, per taxpayer.

Passing federally does not settle the state answer. California does not conform to Section 1202 or Section 1045, so a California resident can owe state tax on gain that is excluded federally.

A QSBS attestation is a written statement from the company, usually signed by an officer, confirming the facts that make a stock issuance qualify under Section 1202. Section 1202 does not name or prescribe one. The statute only says the corporation must agree to submit the reports the IRS and shareholders require. Holders ask for a letter anyway because most of the tests turn on facts only the company can see: its balance sheet, its asset mix, and its buyback history.

It is evidence, not a ruling. A letter does not bind the IRS and does not make stock qualify. You claim the exclusion on your own return, using code Q on Form 8949 for tax year 2025, so you need support for the position if that return is examined.

What a strong QSBS attestation letter covers:

When to ask. Ask at each issuance, because the gross-asset test is measured at that moment and is hardest to rebuild years later. Ask again before a sale, because the C corporation and active business tests run through substantially all of your holding period, and a letter dated at issuance cannot speak to the years after it.

If the company will not sign. Nothing in Section 1202 requires a letter, so some companies decline. Keep what you can get: the stock purchase agreement, cap table, balance sheet nearest the issue date, investor representations, and any redemption records. The file matters more than the format.

These are hypothetical examples to show the mechanics. They are educational, not individualized tax advice, and they are not results for any client.

Example 1: classic stock, under the cap. A founder received stock in 2019 and sells more than 5 years later with an $8 million gain. Stock acquired after September 27, 2010 and on or before July 4, 2025 gets a 100% exclusion, and $8 million is under the $10 million cap. Federal tax on the gain is $0, against $1,904,000 at 23.8% without the exclusion.

Example 2: classic stock, over the cap. Same facts, but a $25 million gain and $100,000 of basis. The cap is the greater of $10 million or 10 times basis ($1 million), so $10 million is excluded. The other $15 million is taxed at 23.8%, or $3,570,000. Without QSBS the bill would be $5,950,000. Founders in this position should read our QSBS stacking guide well before a deal.

Example 3: new-rule stock, $10 million gain, by holding period. The part of eligible gain that is not excluded is taxed at a 28% rate, not 20%, plus the 3.8% Net Investment Income Tax. That is why a partial exclusion is worth a little less than it first appears.

Stock acquired on July 5, 2025 cannot reach the 3-year tier until July 2028. If an exit arrives before your tier, a QSBS rollover under Section 1045 may defer the gain and keep the clock running.

Example 4: new-rule stock, large basis. An investor pays $3 million for stock in a qualified round and later sells for a $50 million gain. The cap is the greater of $15 million or 10 times the $3 million basis, so $30 million of gain is excluded after 5 years. The other $20 million is taxed at 23.8%, or $4,760,000.

• QSBS Stacking: how gifts and non-grantor trusts give more taxpayers their own cap.
• QSBS Rollover (Section 1045): deferring gain when an exit comes before your holding period is met.
• CPA For Startups: entity choice, elections, and tax filings for founders.
• Wealth Strategy Hub: all wealth-building and exit-planning strategies in one place.
• Entity Structure: the C-Corp vs. S-Corp vs. LLC decision that determines QSBS eligibility.
• Equity Compensation: planning for founders and early employees holding stock.
• 83(b) Election Guide - locking in low basis on restricted founder stock, which starts your QSBS holding clock early.
• Tax Services For Startups - how we work with founders from formation through exit.
• Tax-Loss Harvesting: managing the rest of your investment portfolio around an exit.
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