QSBS in 2026: The $15M Exclusion, $75M Asset Cap, and New 3-Year Tiers

Qualified small business stock (QSBS) issued after July 4, 2025 can shelter up to $15 million of gain from federal tax on a new tiered schedule: 50% of the gain is excluded at three years, 75% at four years, and 100% at five. Section 1202 of the tax code grants the exclusion. It applies only to C-corporation stock you acquired at original issuance, and the company's gross assets must have stayed at or below $75 million when the stock was issued.

Key takeaways:

• New (issued after July 4, 2025): $15M per-issuer cap (or 10× your basis), $75M gross-asset limit, and a tiered 50% / 75% / 100% exclusion at 3 / 4 / 5 years
• Old (issued on or before July 4, 2025): $10M cap, $50M asset limit, 100% exclusion only, and only after a full 5-year cliff
• QSBS is C-corporation only; S-corp and LLC ownership never qualifies, though converting to a C-corp starts a fresh clock
• The non-excluded portion is taxed at a 28% maximum federal rate, and 7% of the excluded portion is an alternative minimum tax preference item for the 50% and 75% tiers
• California does not follow Section 1202 at all and taxes the entire gain at up to 13.3%
• The $15M and $75M figures are indexed for inflation starting in 2027

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What Is Qualified Small Business Stock (QSBS)?

Qualified small business stock is C-corporation stock that meets the conditions of Internal Revenue Code Section 1202, the provision that lets a non-corporate shareholder exclude a large share of the gain when they sell. QSBS is not a special certificate you apply for; it is an outcome. Stock becomes QSBS automatically if the company and the shareholder meet every requirement at the moment of issuance and hold the position long enough.

The exclusion is genuinely powerful, which is why it drives so much startup structuring. A founder or early investor who holds fully qualifying stock for five years can walk away from millions of dollars of gain owing zero federal income tax on it. The One Big Beautiful Bill Act (OBBBA) rewrote the numbers in July 2025, so the rules now depend heavily on one date: when your stock was issued.

The Two QSBS Regimes: Before and After July 4, 2025

QSBS now runs on two parallel rulebooks, and the split date is July 4, 2025. Stock issued after that date follows the new, more generous regime with an earlier partial payoff. Stock issued on or before that date keeps the old rules with the all-or-nothing five-year cliff.

The practical change is the partial exclusion. Under the old rules, selling at four years and eleven months got you nothing; you had to clear the full five years. Under the new rules, an exit at three years already frees half the gain, which gives founders and funds a real reason to sell earlier than the old cliff ever allowed.

Test Your Exit Against the Tiers

Who Qualifies: The QSBS Eligibility Checklist

QSBS status requires the corporation and the shareholder to satisfy every one of these conditions. Miss one and the stock is ordinary capital gain.

• ✅ C-corporation stock. The issuer must be a domestic C-corp, both when the stock is issued and generally throughout your holding period.
• ✅ Original issuance. You must acquire the stock directly from the company for money, property, or services, not from another shareholder on the secondary market.
• ✅ Gross-asset test. The corporation's aggregate gross assets must not have exceeded $75 million (new regime) or $50 million (old) at any point up to and immediately after the stock was issued.
• ✅ Active business requirement. At least 80% of the corporation's assets by value must be used in the active conduct of a qualified trade or business.
• ✅ Qualified trade or business. The company cannot be in an excluded field. Section 1202(e)(3) bars health, law, engineering, architecture, accounting, actuarial science, performing arts, consulting, athletics, financial services, and brokerage; banking, insurance, financing, leasing, and investing; farming; extraction of natural resources; and operating a hotel, motel, or restaurant.

Because so much of this is set at issuance, the smart move is to get a QSBS attestation from the company at the time you buy, not to reconstruct gross-asset history years later at exit. Since this is C-corporation territory, the S-corp vs C-corp comparison is a useful companion for founders still choosing an entity.

Worked Example: Selling $12M of Post-OBBBA Stock at 3.5 Years

Consider Dashiell, a founder who buys stock at original issuance in a qualifying C-corp in September 2025 (after the July 4 cutoff, so the new regime applies) for a basis of $100,000. In early 2029, three and a half years later, he sells for $12.1 million, a gain of $12 million, comfortably under the $15 million per-issuer cap. At three and a half years he is in the 50% tier.

Now the timing lesson. If Dashiell held eighteen more months to clear five years, he would reach the 100% tier and owe $0 in federal tax on the full $12 million, with no AMT preference either. Selling at three and a half years instead of five costs him roughly $1.9 million in federal tax. The new 50% tier gives him the option to exit early, but the option is expensive, and the arithmetic is the whole decision. You report the sale and the exclusion on Form 8949 (the exclusion goes in as an adjustment with code Q), and the capital gains tax calculator can frame the taxable-portion math before you commit to a sale date.

Why S-Corp and LLC Stock Never Qualifies, and the Conversion Move

QSBS is C-corporation stock, full stop. An S-corporation shareholder cannot hold QSBS, and an LLC does not issue stock at all, so LLC membership units are never eligible. The most common founder mistake is defaulting to an LLC for its tax flexibility, then discovering at exit that the units were never in the running for Section 1202.

There is a fix, but it resets the clock. When an LLC or S-corp converts to a C-corporation and issues stock, the QSBS holding period starts on the date of that conversion, not on the day you originally formed the business. Two nuances that a founder planning a conversion has to price in, confirmed across practitioner guidance on Section 1202:

• Only post-conversion appreciation qualifies. Any built-in gain that accrued in the LLC before the conversion is not eligible for the exclusion. Section 1202 looks to the fair market value of the assets contributed at conversion when it measures your basis for the 10× cap.
• The FMV at conversion counts toward the gross-asset test. If the business is already worth more than $75 million when you convert, the stock cannot be QSBS at all, because the corporation blows the gross-asset limit at issuance.

That is why the conversion conversation happens early, while the company is small, or not at all.

How the Taxable Portion Is Taxed: 28% and the AMT Preference

For any QSBS in the 50% or 75% tiers, the part of the gain you do not exclude is not taxed at the usual long-term capital gains rate. It is "28% rate gain" under Section 1(h), taxed at a maximum federal rate of 28%, higher than the 20% top rate that applies to ordinary long-term gains. On top of that, 7% of the amount you exclude is a preference item for the alternative minimum tax under Section 57(a)(7), which can pull high-income sellers into AMT.

Stock that reaches the 100% tier is cleaner on both counts: there is no included gain to tax at 28%, and stock eligible for the 100% exclusion carries no AMT preference. The tax friction on QSBS is entirely a feature of the 50% and 75% tiers, which is another reason the five-year hold remains the gold standard even under the new earlier-exit rules.

What Does NOT Qualify for QSBS

Section 1202 is narrow, and these near-misses are where taxpayers lose the exclusion:

• ❌ Secondary purchases. Stock you buy from another shareholder is not original issuance and cannot be QSBS in your hands, no matter how small the company is.
• ❌ Options and warrants, until exercised. A stock option is not stock. The holding period starts when you exercise and actually acquire the shares.
• ❌ S-corporation stock. An S-corp shareholder is disqualified from Section 1202 by definition.
• ❌ LLC or partnership interests. Membership units are not corporate stock.
• ❌ Stock in an excluded business. A profitable consulting firm or restaurant chain can be tiny and still fail the qualified-trade-or-business test.
• ❌ Gain above your cap. Beyond the greater of $15 million or 10× your basis, the excess is ordinary capital gain.

State Trap: California Taxes QSBS in Full

California does not conform to Section 1202. California repealed its state QSBS provisions in 2013 after the Cutler v. Franchise Tax Board decision, so for California residents the entire gain is taxable at the state level (up to 13.3%) even when 100% of it is excluded federally. In Dashiell's example, a California resident would owe up to about $1.6 million in state tax on the full $12 million gain regardless of how the federal exclusion plays out. State conformity is not uniform, so a shareholder in a high-tax state should model the state result separately before treating QSBS as tax-free money. Founders weighing this alongside other early-stage write-offs can start with the startup expenses deduction guide.

Common QSBS Mistakes

Assuming the LLC will hand you QSBS. LLC units never qualify. If Section 1202 is the goal, the entity has to be a C-corp, and the conversion has to happen while the company is still under the gross-asset limit.

Buying on the secondary market and expecting the exclusion. Only original issuance qualifies. Purchasing founder shares from a departing colleague forfeits QSBS treatment on those shares.

Missing the tier by weeks. Under the new regime, three years earns the 50% exclusion and four years earns 75%. Selling at two years and eleven months excludes nothing.

Forgetting the 28% rate and AMT on partial exclusions. The included half or quarter is taxed at 28%, not 20%, and the excluded portion can trigger AMT. A 50%-tier sale is not "half tax-free at your normal rate."

Treating a federal exclusion as a state exclusion. In California and several other nonconforming states, the full gain is taxable regardless of Section 1202.

Structuring for QSBS: How Jupid Helps

QSBS eligibility is decided long before a sale, in the paperwork of how the company is built and how its assets are tracked. Jupid keeps a clean, categorized record of the business from day one: an AI accountant reachable in WhatsApp and iMessage, wired to your bank, sorting transactions automatically at 95.9% accuracy. That running record is exactly what the gross-asset test and the active-business test lean on, and it is far easier to prove QSBS eligibility from books that were straight all along than to reconstruct them under deadline at exit. Ask about your numbers in plain language and get answers built from real data. Try Jupid.

Action Checklist

• Confirm the issuer is a domestic C-corporation and that you acquired the stock at original issuance
• Get a written QSBS attestation from the company at purchase, covering the gross-asset and active-business tests
• Record the exact issuance date and mark the 3-year, 4-year, and 5-year milestones on a calendar
• Keep records showing the corporation stayed under the $75M (or $50M) gross-asset limit through issuance
• Before selling, model the 28% rate on any included gain, the AMT preference, and your state's conformity
• Report the sale and exclusion on Form 8949 with adjustment code Q, carried to Schedule D

Sources

• IRC Section 1202 — Partial exclusion for gain from certain small business stock
• IRC Section 1202(e)(3) — Definition of qualified trade or business
• MGO CPA — QSBS: Converting an LLC or S Corp Before a Sale
• Fenwick — Tax Alert: FTB Disallows California QSBS Benefits
• IRS — About Schedule D and Form 8949 (reporting the exclusion)

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This guide is for general educational purposes and does not constitute tax, legal, or accounting advice. Section 1202 is fact-intensive and depends on issuance date, entity type, and state conformity; qualification often requires a written analysis. For advice specific to your situation, consult a qualified tax professional.