IRC §1202

Qualified Small Business Stock (QSBS)

Section 1202 may exclude gain from qualifying original-issue C-Corporation stock. The rules depend on acquisition date. For stock acquired after July 4, 2025, the federal exclusion is generally 50% after 3 years, 75% after 4 years, and 100% after 5 years; the per-issuer dollar limit is generally $15 million or 10× basis, whichever is greater. Stock acquired on or before July 4, 2025 generally remains subject to the legacy holding-period and $10 million rules.

State treatment varies. California does not conform to the federal exclusion, so a federally excluded gain can still be fully taxable by California. Confirm current federal and state treatment before a transfer or sale.

Who this may apply to

Own qualifying original-issue C-Corporation stock; the gross-asset ceiling is generally $75 million for stock issued after July 4, 2025 and $50 million under the legacy rule
Stock acquired at original issuance
Meet the applicable holding period for the stock’s acquisition date
Corporation is an active business (not investment company)

Strategy connections

Works well with

C-Corporation Conversion / Management Corporation: Section 1202 generally applies to eligible stock issued by a qualifying C corporation.
Estate & Wealth Transfer Planning: Transfer planning must preserve holding-period, basis, and eligibility records.

What could block this

Issuer or business fails Section 1202 requirements
Stock was not acquired in a qualifying original issuance
The required holding period is not met

Important considerations

California does not recognize the §1202 exclusion at all — CA residents owe California capital gains tax (up to 13.3%) on the full excluded gain. On a $10,000,000 exclusion, that’s potentially $1,300,000 in CA tax that remains due even though the same gain is $0 federally. For founders in CA, domicile planning before a liquidity event requires a state and local tax attorney and must be genuine and completed well before the sale.
Other non-conforming states include NJ and PA — verify your state’s treatment before planning around QSBS as a total tax elimination strategy.
Certain businesses are excluded: professional service firms, finance, banking, farming, hotels, restaurants
The gross-asset test is measured around issuance and depends on issuance date: generally $75 million for stock issued after July 4, 2025 and $50 million under the legacy rule. Document the test carefully.
Stacking QSBS across family members (spouses, children, trusts) can multiply the exclusion — but each must independently own qualifying shares. Engage a corporate or securities tax attorney and an estate-planning attorney before transfers are documented.

Professional support

QSBS-experienced tax CPA + corporate or securities tax attorney

The CPA models and reports the exclusion; corporate or securities tax counsel reviews original issuance, company qualification, transfer documents, and sale or rollover structure.

Timing

The holding period starts at acquisition. Post-July 4, 2025 stock may receive a phased exclusion beginning after 3 years; earlier stock generally follows the legacy longer-than-5-year rule. Qualification must be supported from issuance — it cannot be created retroactively.

Official sources

Reviewed 2026-08-12