QSBS

Qualified Small Business Stock can exclude a large fraction of federal capital gain on sale of eligible C-corp stock held long enough. Startup common acquired at original issuance often aims for QSBS; not all companies or shareholders qualify (gross assets test, active business, shareholder eligibility, redemption rules, etc.).

Delaware C-corp operating companies in many tech verticals are the poster child. Pass-throughs, many non-US structures and some excluded businesses do not play the same way. Acquisition structures can also mess with eligibility.

Rules change — especially QSBS after July 2025. Verify current law for your facts. This is not tax advice.

The big idea

You generally need to hold stock, not unexercised options, and original-issuance requirements matter. Early exercise can start the clock earlier. This is high-value professional territory for founders and early employees with large outcomes.

Stock issued on or before July 4, 2025

• Generally > 5 year holding period for the familiar exclusion
• Per-issuer exclusion commonly described as greater of $10M or 10× basis
• Aggregate gross assets test historically ≤ $50M around issuance

Stock issued after July 4, 2025

One Big Beautiful Bill Act changes — verify against primary sources for your date:

• Tiered exclusion by holding period: 50% at ≥ 3 years, 75% at ≥ 4 years, 100% at ≥ 5 years
• Per-issuer cap increased to $15M (inflation adjustments begin in later years per guidance)
• Gross assets threshold increased to $75M (also with later inflation indexing)

Rough checklist before calling counsel (not sufficient on its own): domestic C-corporation stock acquired at original issuance (not bought from another shareholder — tender structuring matters); company within the gross-assets threshold around issuance; active qualified business (many software businesses fit; some do not); holding period met; per-issuer cap not already used up. Redemptions, related-party transfers and certain convertible exchanges create foot-guns.

Walking through a 2025 issuance

You early-exercise eligible common in August 2025, hold through August 2028 (3 years), sell in a secondary for $6M gain. Under the tiered regime as summarized by major firms after the Act, a 50% exclusion might apply at three years — federal tax still hits the other half (and NIIT / state may apply). Waiting to year five for 100% exclusion could be worth millions; liquidity and concentration risk pull the other way. Run scenarios with a CPA; do not treat blog tables as filing positions.

Common mistakes

• Assuming options start the QSBS clock. You generally need stock, which means exercise.
• Buying shares from another employee and expecting original-issuance QSBS.
• Ignoring the per-issuer cap across prior sales of the same company's stock.

Check yourself

You hold unexercised ISOs for four years, then exercise and sell a month later. QSBS 5-year clock?

The stock holding period starts at exercise, not at grant. Four years of unexercised options do not count.

Stock issued in August 2025, sold after three years. Under the post–July 2025 tier as described here, what exclusion might apply?

50% federal exclusion at ≥ 3 years — confirm current law, and state tax may still apply.

Key takeaways

• QSBS can exclude a large fraction of federal capital gain on eligible original-issue C-corp stock.
• Pre–July 4, 2025 issuances: classic 5-year / $10M-or-10× rules and a $50M assets test.
• Later issuances: tiered 3/4/5-year exclusion, $15M cap, $75M assets test — verify.
• Exercise (or restricted stock) starts the stock clock; options do not.

Further learning

Foley Hoag summary of 2025 QSBS changesLearn more about the latest updates in legal, with expert commentary and insights from trusted attorneys from Foley Hoag LLP. Foley Hoag is a professional community of highly qualified attorneys from all over the US.foleyhoag.com

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