What QSBS Is, and What Changed in July 2025
Sell a company you built and the tax bill can swallow a third of what you walk away with. Qualified small business stock, QSBS for short, is the federal rule that can bring that bill to zero on up to $15 million of gain, and in some cases far more. It is not a loophole. Congress wrote it to reward the people who fund and build young companies, and it has been in the tax code in some form since 1993.
The idea is simple even though the tests are not. QSBS is stock in a domestic C corporation (a regular corporation that pays its own tax) that was still small when it issued your shares, that you acquired directly from the company rather than from another shareholder, and that runs a real operating business. Hold it long enough and part or all of your gain simply never appears on your federal return.
On July 4, 2025, a new tax law split this world in two. Stock issued on or before that date lives under the old rules for as long as you hold it. Stock issued after that date gets a new, more generous set. Most of what ranks on Google, and a surprising number of professional guides, still describes only the old rules, so the first question in any QSBS conversation is now the date on your shares.
The New Rules for Stock Issued After July 4, 2025
The old law was a cliff. For stock acquired after September 27, 2010, you excluded 100% of the gain if you held five full years, and nothing at all if you sold a day early. The new law replaces the cliff with a ramp and raises the money limits at the same time.
| Rule | Stock issued on or before July 4, 2025 | Stock issued after July 4, 2025 |
|---|---|---|
| Exclusion schedule | Nothing until year five, then 100% (for stock acquired after September 27, 2010) | 50% at three years, 75% at four, 100% at five |
| Cap per company, per person | Greater of $10 million or 10 times what you paid | Greater of $15 million or 10 times what you paid |
| Company-size ceiling at issuance | $50 million in gross assets | $75 million in gross assets |
| Adjusted for inflation | No | Yes, the $15 million and $75 million figures, starting after 2026 |
| Alternative minimum tax add-back | None at 100%; older partial-exclusion stock carried one | None at any tier |
Swipe the table sideways to compare.
Notice the second row. For a founder whose basis is close to zero, the flat dollar cap is the number that binds. An investor who put in serious money gets the ten-times multiplier instead, so $3 million of invested cash can support up to $30 million of excluded gain in one company.
Two pieces of fine print matter. First, the partial tiers are not half price in the way people assume, because the gain you still include at the three- and four-year marks is taxed at a 28% federal rate rather than the usual 20%, plus the 3.8% investment surtax. Selling a new-rules position at three years works out to roughly a 14% federal rate on the whole gain, against 0% at five years, so the last two years of holding are usually worth real money. Second, if you own shares in the same company from both eras, each block keeps its own rules, and what you exclude on one block reduces the cap available to the others. That tracking, and the math at sale, runs through your CPA. The planning that decides what there is to track is where we come in.
Who Qualifies for QSBS
Four gates, and your shares have to clear all of them.
- A C corporation, start to finish. Only a C corporation can issue qualifying stock, and the company has to stay a C corporation for essentially your whole holding period. Stock issued by an S corporation never qualifies, even if the company converts later, and LLC membership units never qualify at all.
- Original issue. You must get the shares directly from the company, in exchange for money, property, or your work. Founders’ shares and equity compensation count, which is why sweat-equity arrangements should be papered as stock from the company rather than a side deal between owners. Shares bought from another stockholder bring no exclusion, ever.
- Small enough when your shares were issued. The company’s gross assets must be under the ceiling ($75 million for new-rules stock, $50 million for older stock) up to and right after your issuance. The test is taken share by share, at each issuance. Once your shares pass it, the company can grow past the ceiling without hurting them, which is exactly why earlier shares are safer shares.
- An active, qualifying business. At least 80% of the company’s assets must be used in an active qualified business. The excluded list is long, and it targets businesses that sell services or a person’s reputation, including law, health, accounting, consulting, financial services, brokerage, performing arts, athletics, plus banking, insurance, investing, farming, mining, and hotels and restaurants. Product and software companies usually qualify. The gray zone (a health-tech platform versus a medical practice, a fintech product versus a financial-services firm) is wider than people think, and it gets decided on facts, so screen it early.
The Traps That Disqualify Good Stock
The redemption trap is the one that catches well-run companies. If the company buys back shares from you or from someone related to you within two years before or after your shares were issued, your shares are disqualified. And if the company buys back more than 5% of its stock within one year on either side of an issuance, every share issued in that window can be tainted, including shares held by people who had nothing to do with the buyback. Founder departures, dead-equity cleanups, and buyout provisions all have to be drafted and timed with this in mind.
The convertible trap is quieter. SAFEs, convertible notes, and stock options do not start the holding clock; the clock starts when actual stock is issued, at conversion or exercise. That cuts both ways. A SAFE signed in 2021 that converts in 2026 produces new-rules stock, which is good news. But the company-size test is measured at that conversion, and a company that has grown past the ceiling by then issues stock that does not qualify at all. Converting or exercising while the company is still small is often the whole game.
Structure changes can end it too. An S election made mid-hold breaks the C-corporation requirement. A merger or reorganization can preserve the exclusion, freeze it at its value on the exchange date, or destroy it, depending entirely on how the deal is built. Before signing anything that touches the cap table, have the QSBS effect checked, because these mistakes rarely show up until the year of sale, when they are unfixable.
And keep the proof. Years from now someone will have to show what the company’s assets were on your issuance date, what you paid, and what the business did. Issuance-date financials, board consents, and the cap table are cheap to save and expensive to reconstruct.
Sold Too Early? The 60-Day Rollover
Deals do not wait for tax clocks. If an acquirer shows up at year two, the exclusion is not simply lost. Provided you held the shares more than six months, you can sell, reinvest the proceeds into new qualifying stock within 60 days, and elect on your tax return to defer the gain. Your original holding time carries over to the replacement shares and keeps running toward the tiers. Reinvest only part of the proceeds and only that part is deferred.
The honest caveat is the window. Sixty days is a very short time to find and close on replacement stock that itself qualifies, so in practice this works when the replacement is lined up before your sale closes, not discovered in April. Your CPA files the election; we build the structure and the paper trail that lets it hold.
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Book your free consultEntity Choice and the LLC-to-C Conversion Clock
Most companies that will one day produce QSBS start life as something that cannot. Starting as an LLC is often right in the early years, because losses flow through to the owners and key people can be brought in with profits interests. But LLC units never qualify, and the holding clock starts only when a C corporation issues stock. (The wider entity-choice tradeoffs live in S corp vs C corp.)
That makes the conversion the pivotal date. Converting an LLC into a C corporation issues fresh stock, which starts every owner’s clock, takes the company-size snapshot at that moment, and, because any conversion signed today happens after July 4, 2025, brings the stock in under the new rules. Convert too late, after the business has sailed past $75 million in assets, and the exclusion is forfeited for everyone.
There is a quieter reward for waiting just long enough. The shares issued in a conversion take the business’s value at that moment as their measuring stick for the ten-times cap. A company already worth $20 million when it converts can carry a cap of up to $200 million on the growth that comes after, even though the appreciation built up before the conversion never becomes excludable. Picking the moment is a genuine trade-off between the clock, the snapshot, and the cap, and it deserves more thought than it usually gets.
The documents matter as much as the date. The operating agreement on the way in, and the stockholder agreement on the way out, decide how departures and buybacks happen, and those are exactly the events the redemption trap punishes. We draft them so an ordinary exit by one owner does not quietly cost the others their exclusion.
One Cap Per Person, and How Gifts, Trusts, and Estates Fit
The cap belongs to the taxpayer, not the company. Every person, and every trust that pays its own tax, gets a separate per-company cap. That single fact drives most advanced QSBS planning.
A gift of qualifying shares is one of the few transfers that keeps everything. The recipient inherits the qualification and your holding time, and arrives with a cap of their own. Founders expecting gain far above one cap sometimes settle several non-grantor trusts (trusts taxed as their own taxpayers) for children or family branches before an exit, each trust holding shares under its own cap. We will be straight with you about this one. Multiplying caps through trusts is an aggressive, closely watched corner of the law. It holds up when the trusts are created early, funded properly, and serve a real family purpose, and it invites a challenge when a stack of identical trusts appears the month before a signed deal. Done at all, it is done carefully, with your CPA in the room.
The estate angle is the one nobody markets. Shares that pass at death reach your heirs with the qualification and holding period intact, plus a stepped-up basis that erases the income tax on all the growth to that point. For an older holder, the right answer is sometimes to keep the shares and let the estate plan do the work, with the trust and titling choices made while there is still time to make them. How business interests sit inside a trust generally is its own topic, covered in our guide to putting a business in a trust.
State Taxes and the Florida Move
The federal exclusion says nothing about your state, and the state piece is where sellers get blindsided. California does not follow the federal rule at all. It taxes the entire gain at rates up to 13.3%, so a founder with $10 million excluded federally can still owe about $1.3 million to Sacramento. Alabama, Mississippi, and Pennsylvania tax the gain too. New Jersey did for years, until a law signed in June 2025 adopted the federal exclusion for sales in 2026 and later. Florida has no personal income tax, so a Florida resident keeps every dollar the federal exclusion protects.
The play is to become a Florida resident before the year you sell, and to make the move real. Residency for the exit year is what decides, and the high-tax states audit departing residents who leave the year a large gain lands, California most of all. A move stitched together three weeks before closing invites that fight. A clean move a year or more ahead, with the home, the days, the licenses, and the filings all pointing the same way, usually settles it before it starts. Our guide to the Florida declaration of domicile walks the checklist we use.
One more border case. A founder moving to the United States ahead of an exit has a different clock running entirely, covered in our guide to pre-immigration tax planning.
How We Work With You and Your CPA
QSBS work splits cleanly into two lanes, and we are plain about which is ours. We handle the structural lane, meaning entity choice and conversion timing, stockholder and equity documents drafted around the disqualifiers, gifting and trust design, the estate integration, and the Florida residency piece. The computational lane, the exclusion math, the elections, and the position taken on your return, runs through your CPA, and we work from the same numbers rather than around each other. If you do not have a CPA comfortable with this work, we will tell you what to look for.
The common thread in everything above is that the exclusion is decided years before the sale, by the entity, the dates, and the documents. Most planning here is flat-fee, quoted at the consult once we see the structure (our pricing page shows how we approach fees), and it starts with a conversation, not a commitment. You do not need to have it figured out first.
Frequently Asked Questions
What Is Qualified Small Business Stock?
Qualified small business stock, or QSBS, is stock in a domestic C corporation that was still small when it issued your shares, that you acquired directly from the company rather than from another shareholder, and that runs an active operating business. Hold it long enough and the federal tax code's small-business-stock rules let you exclude some or all of the capital gain when you sell, up to at least $10 million per company under the old rules and $15 million under the new ones, and often more for investors with real basis. It is one of the largest legal tax benefits available to founders, early employees, and startup investors, and it is won or lost years before the sale.
What Did the July 2025 Law Change?
For stock issued after July 4, 2025, the all-or-nothing five-year cliff became a ramp. You now exclude 50% of the gain after three years, 75% after four, and 100% after five. The per-company cap rose from $10 million to $15 million (adjusted for inflation starting after 2026), the company-size ceiling rose from $50 million to $75 million in gross assets, and the excluded gain no longer creates any alternative-minimum-tax add-back at any tier. Stock issued on or before July 4, 2025 keeps the old rules for as long as you hold it, so many people now own shares under both regimes at once.
Do My Shares Fall Under the Old Rules or the New Ones?
The issuance date decides, and it is not always the date you think. Shares bought or granted outright carry their issue date. But options count from the day you exercise, and SAFEs and convertible notes generally count from the day they convert into actual stock, not the day you signed or wired money. A SAFE from 2021 that converts in 2026 produces new-rules stock with a 2026 clock. If you hold shares in the same company from both eras, each block keeps its own schedule and cap rules, and the blocks interact when you sell, so they have to be tracked separately from day one.
Can an LLC or S Corporation Issue QSBS?
No. Only a C corporation can issue qualifying stock. Stock issued while a company is an S corporation never qualifies, even if the company later converts, and LLC membership units never qualify at all. What an LLC can do is convert into a C corporation, and the stock issued in that conversion can qualify. The holding clock starts at the conversion, the company-size test is measured then, and because any conversion signed today happens after July 4, 2025, the new stock comes in under the friendlier new rules. The timing of that conversion is one of the biggest planning decisions a founder makes.
How Much Gain Can I Exclude?
Per company and per taxpayer, the cap is the greater of a flat dollar amount or ten times what you paid for the shares. The flat amount is $15 million for stock issued after July 4, 2025 and $10 million for older stock. Founders with a near-zero basis are bound by the flat number; an investor who put in $3 million of cash could exclude up to $30 million. One caution on the new partial tiers, because they are not half price in the way people assume. The gain you still include at the three- and four-year marks is taxed at a 28% federal rate rather than the usual 20%, so reaching the full five years is usually worth real money.
Which States Tax QSBS Gain?
This is the half of QSBS almost nobody prices in. California does not follow the federal exclusion at all and taxes the entire gain at rates up to 13.3%, no matter what your federal return shows. Alabama, Mississippi, and Pennsylvania also tax it. New Jersey taxed it for years, but a law signed in June 2025 adopts the federal exclusion for sales in 2026 and later. Florida has no personal income tax, so a Florida resident keeps every dollar the federal exclusion protects. Your state residency in the year you sell is what decides, which is why the move has to happen before the exit year, not during it.
Can I Gift QSBS or Put It in a Trust?
Yes, and it is one of the few transfers that keeps everything. A gift of qualifying shares carries the qualification and your holding time over to the recipient, who then has a per-company cap of their own. That is why founders expecting gain well above one cap sometimes settle non-grantor trusts (trusts that pay their own tax) for children or family branches before an exit, each trust with its own cap. It can work, but it is an aggressive, closely watched corner of the law, and it only holds up when the trusts are created early, funded properly, and serve a real family purpose. At death the shares pass to your heirs with qualification intact plus a stepped-up basis, which can erase the income tax on all the growth to that point.
What If I Have to Sell Before My Holding Period Is Up?
There is a rescue, but it is unforgiving. If you held the shares more than six months, you can sell and reinvest the proceeds into new qualifying stock within 60 days, elect the rollover on your tax return, and defer the gain, with your original holding time carrying over and continuing to run on the replacement shares. Reinvest only part of the proceeds and only that part is deferred. Sixty days is a very short window to find replacement stock that itself qualifies, so this works when it is planned before the closing, not discovered at tax time. Your CPA files the election; we line up the structure and the paper.
What Do You Handle, and What Does My CPA Handle?
The work splits into two lanes and we are plain about which is ours. We handle the structural lane, meaning entity choice and the timing of an LLC-to-C conversion, stockholder and equity documents drafted so a buyback or reorganization does not disqualify the stock, gifting and trust design, the estate integration, and the Florida residency piece. The computational lane, meaning the exclusion math, the elections, and the position taken on your return, runs through your CPA, and we work from the same numbers. If you do not yet have a CPA comfortable with this, we will tell you what to look for.
Common Situations
The two founders converting ahead of a priced round. A software LLC worth about $6 million has a term sheet coming. Converting to a C corporation now starts both founders’ holding clocks under the new rules, takes the company-size snapshot while it is comfortably under $75 million, and lets the incoming investors buy stock that qualifies from day one. The old operating agreement’s buyout clause is rewritten as a stockholder agreement so a future departure buyback cannot taint anyone’s shares.
The California founder two years out. A founder expects roughly $20 million of gain on shares that will hit their five-year mark in two years. The federal exclusion will cover most of it, but as a California resident she would still owe state tax on the entire gain. She moves to Miami this year, buys the home, records the declaration of domicile, and shifts the days, the licenses, and the professionals. By the sale year the residency question has a clean answer, and the difference is measured in seven figures.
The early employee with options on both sides of July 2025. An engineer exercised part of his options in 2024 and the rest in 2026. The 2024 shares live under the old rules, a five-year cliff and a $10 million cap. The 2026 shares ramp at three, four, and five years under a $15 million cap, and the two blocks share interacting limits. Mapping the blocks now lets him and his CPA time the eventual sale in slices instead of guessing at the closing table.
Sources of Law
- The exclusion: 26 U.S.C. §1202, as amended by Pub. L. 119-21, §70431 (the One Big Beautiful Bill Act, July 4, 2025): tiered applicable percentage (50% at three years, 75% at four, 100% at five) for stock acquired after July 4, 2025; per-issuer cap equal to the greater of $15,000,000 (indexed for taxable years after 2026) or 10 times aggregate adjusted basis; $75,000,000 aggregate-gross-assets ceiling (indexed) for stock issued after July 4, 2025. Legacy rules for earlier stock: greater of $10,000,000 or 10 times basis; $50,000,000 ceiling; 100% exclusion for stock acquired after September 27, 2010 and held more than five years. law.cornell.edu
- Qualification and traps: §1202(c) (C-corporation and original-issue requirements); §1202(c)(3) (redemption look-backs, including the significant-redemption rule); §1202(d) (aggregate gross assets); §1202(e) (active-business requirement and excluded fields); §1202(h) (transfers by gift and at death carry qualification and holding period); §1202(i) (contributed-property basis rules).
- The rollover: 26 U.S.C. §1045 (stock held more than six months; 60-day reinvestment in replacement qualified small business stock; tacked holding period). law.cornell.edu
- Rates and AMT: 26 U.S.C. §1(h)(4) (28% rate on the included portion of partially excluded small-business-stock gain); 26 U.S.C. §57(a)(7) as amended by Pub. L. 119-21 (no alternative-minimum-tax preference for the new exclusion tiers); 26 U.S.C. §1014 (basis step-up at death).
- State conformity: California does not conform (former Cal. Rev. & Tax. Code §18152.5; Cutler v. Franchise Tax Board, 208 Cal. App. 4th 1247 (2012); Franchise Tax Board guidance); New Jersey A4455/S4503, signed June 30, 2025 (conformity for tax years beginning on or after January 1, 2026); Alabama, Mississippi, and Pennsylvania remain non-conforming. (retrieved 2026-08-08)
Updated on August 8, 2026. Reviewed by Kevin D. Klagge, Esq., Fla. Bar No. 99502. Attorney Kevin Klagge represents families, businesses, and international clients in estate and tax planning, business structuring, and international law, with a focus on Florida legal tools. He litigates estate and business issues in court. This article is general information about US law, not legal or tax advice, and does not create an attorney-client relationship. Exclusion computations, elections, and the positions taken on your tax return are handled with and through your CPA or return preparer. Federal figures are adjusted periodically and may change, and state rules vary. Your result depends on your specific facts.