Qualified Small Business Stock Tax Exclusion: What Changed

The qualified small business stock tax exclusion lets eligible shareholders exclude some or all of their gain from federal tax. The rules just changed.

What is the qualified small business stock tax exclusion?

The qualified small business stock tax exclusion is a provision of federal tax law (26 U.S.C. 1202) that lets a shareholder exclude eligible gain from gross income when selling stock in a qualifying small C corporation. It is a genuine statutory exclusion, not a deferral. But it only applies when every condition is met: the stock must be in a domestic C corporation, acquired at original issuance, held for the required period, and issued by a company that stayed under the asset ceiling and ran an eligible line of business. Miss one condition and the exclusion is simply unavailable.

Qualified small business stock (QSBS)

Stock in a domestic C corporation that met the size and business-activity tests at the time it was issued to you.

Original issuance

You acquired the shares directly from the company in exchange for money, property, or services. Buying shares from another shareholder generally does not qualify.

Per-issuer cap

The maximum eligible gain you can exclude from a single company. The cap applies per taxpayer, per issuer.

Aggregate gross assets

The company's total assets, measured at and immediately after the stock was issued to you.

Section 1202 is decided by facts that were locked in years earlier. By the time a term sheet arrives, most of the eligibility questions have already been answered.

What changed in the qualified small business stock rules?

Three changes matter most, and all of them turn on when the stock was acquired.

The company size ceiling also moved. A qualified small business may now have up to $75,000,000 in aggregate gross assets, raised from $50,000,000 by Public Law 119-21. That change brings a wider set of funded and profitable companies inside the door than the old ceiling did.

For the 2026 tax year the cap is $15,000,000 flat. The statute provides for inflation adjustment of that amount for tax years beginning after 2026, so confirm the current-year number before you rely on it. The statute also provides an alternative cap of 10 times the aggregate adjusted basis of the qualified stock you dispose of that year, which is the larger figure for shareholders who paid more than $1,500,000 for their shares.

Do you still have to hold the stock for five years?

For older stock, yes. For stock acquired after July 4, 2025, there is now a partial path. Hold it three years and 50 percent of eligible gain qualifies. Hold it four years and 75 percent qualifies. Hold it five years or more and 100 percent qualifies.

That tiering changes how an early exit conversation should be framed. A founder who previously faced an all-or-nothing cliff at five years may now have a middle option worth modeling. It does not make an early sale automatically better. It makes the timing question a calculation instead of a foregone conclusion.

The tiered holding period turns "we missed the window" into "here is what the window is worth at each year." That is a planning question, and it has a number attached.

Which companies and shareholders qualify?

Section 1202 sets several tests. In broad terms:

• The issuer is a domestic C corporation. Stock in an S corporation, and a membership interest in an LLC taxed as a partnership, do not qualify.
• The company's aggregate gross assets did not exceed the ceiling at and immediately after your stock was issued.
• You acquired the stock at original issuance, not on the secondary market.
• At least 80 percent of the company's assets, by value, must be used in the active conduct of a qualified trade or business for substantially all of your holding period.
• The business is not on the excluded list. Professional services such as health, law, accounting, engineering, architecture, consulting, actuarial science, performing arts, athletics, and financial or brokerage services are excluded, as are banking and insurance, farming, mining and natural resource extraction, and hotels, motels, and restaurants.

One more caution: this is federal treatment. Not every state conforms to Section 1202, and state conformity should be confirmed for your specific residence and the company's state of operation.

What should business owners do before a sale?

The exclusion is won or lost in the years before a transaction, which is why it belongs in a coordinated plan rather than a return prepared after the fact. Practical steps:

• Document acquisition dates and the company's gross assets at each issuance. That paperwork is the evidence a buyer's diligence team and your own tax professional will ask for.
• Review entity structure early. A company operating as an LLC or S corporation is not on the QSBS path, and any conversion starts a new clock.
• Model the holding period tiers against realistic exit timing before you negotiate a closing date.
• Get the tax professional, the transaction attorney, and the planning side in the same conversation. Disconnected advice is where eligibility questions fall through the cracks. See how to coordinate your CPA, advisor, and attorney.
• Look past the sale itself. Gain treatment is one piece; what happens to the proceeds is another. Our pieces on estate planning basics before a transaction and tax compliance versus tax strategy cover the next layer.

Anchor's role here is strategy and coordination across your advisors, not tax filing or legal drafting. Your CPA files. Your attorney drafts. We work to make sure those two are pointed at the same plan.

Frequently asked questions

Can an LLC or S corporation owner claim the exclusion?

Not on that interest. Section 1202 applies to stock in a domestic C corporation. Some owners convert to a C corporation, but the qualifying clock and the asset test are measured from the new issuance, and the decision has consequences well beyond QSBS. Discuss it with your tax professional and attorney before acting.

Does the cap apply per company or per person?

Per taxpayer, per issuer. Two shareholders in the same company each have their own cap. That is why some families discuss gifting or trust planning around QSBS shares, an area with real complexity and anti-abuse considerations that requires counsel.

What happens if I sell before the holding period is met?

For stock acquired after July 4, 2025, partial exclusion may apply at three and four years. Separately, 26 U.S.C. 1045 permits a rollover of gain into other qualified small business stock within a set period, which can preserve the holding period in some cases. Both paths have strict requirements.

Will my state follow the federal exclusion?

Not necessarily. State conformity to Section 1202 varies, and a full federal exclusion can still leave a state tax result. Confirm treatment for your state of residence and the company's operating state.

Does the $15,000,000 cap change every year?

For the 2026 tax year it is $15,000,000 flat. The statute provides for inflation adjustment of that amount for tax years beginning after 2026, so check the current figure each year.

Sources

1. 26 U.S.C. 1202(b), qualified small business stock, for the $15,000,000 per-issuer exclusion cap on stock acquired after July 4, 2025 and the $10,000,000 cap on stock acquired on or before that date.
2. 26 U.S.C. 1202(a), exclusion percentages by holding period, for the 50 percent, 75 percent, and 100 percent tiers at three, four, and five years for stock acquired after July 4, 2025.
3. 26 U.S.C. 1202(d), qualified small business defined, for the $75,000,000 aggregate gross assets ceiling raised from $50,000,000 by Public Law 119-21.
4. 26 U.S.C. 1202(e), active business requirement, for the active trade or business test and the excluded business categories.
5. 26 U.S.C. 1045, rollover of gain from qualified small business stock, for the rollover option referenced in the FAQ.
6. IRS Publication 550, Investment Income and Expenses, for general IRS guidance on reporting gains on qualified small business stock.