QSBS
QSBS is stock issued by a qualifying C-corporation that, meeting Section 1202's requirements, can exclude a capped amount of gain from federal capital gains tax. For stock acquired on or before July 4, 2025, the exclusion is the greater of $10 million or 10× the holder's basis and requires a full 5-year holding period. For stock acquired after July 4, 2025, the 2025 One Big Beautiful Bill Act (P.L. 119-21) raises the cap to the greater of $15 million or 10× basis and lets the exclusion vest by holding period (50% at 3 years, 75% at 4 years, 100% at 5 years).
QSBS is the most powerful tax planning mechanism available to a US founder or early employee. To qualify, the stock must have been issued at original issue by a domestic C-corporation that was in a qualified trade or business (excluding services, banking, investing, restaurants, hotels) and that met the 'gross-asset test' at issuance. The July 2025 One Big Beautiful Bill Act (P.L. 119-21) split Section 1202 into two regimes by acquisition date. Stock acquired on or before July 4, 2025 follows the original rules: the corporation's aggregate gross assets must have been $50M or less at issuance, and the stock must be held a full 5 years — a cliff, with 0% exclusion before year 5 and 100% at year 5. Stock acquired after July 4, 2025 follows the new rules: the gross-asset ceiling rises to $75M, and the exclusion vests by holding period — 50% at 3 years, 75% at 4 years, and 100% at 5 years.
The per-issuer exclusion cap is the greater of a dollar cap or 10× basis. That dollar cap is $10M for stock acquired on or before July 4, 2025 and $15M for stock acquired after that date — so a founder with $1M basis can exclude up to $10M (old-regime stock) or $15M (new-regime stock) of gain. For ultra-high-net-worth founders, the cap can be increased through 'stacking' — gifting QSBS to a non-grantor trust before the sale, which gives the trust its own separate Section 1202 exclusion. A founder with three children's non-grantor trusts can effectively stack to $60M of exclusion on new-regime stock ($15M individual + $15M per trust × 3 trusts); the same structure on old-regime stock stacks to $40M ($10M × 4).
State-level conformity varies. California does not conform — it taxes the QSBS gain at full state rates. Pennsylvania also does not conform: QSBS gain is fully taxable for Pennsylvania personal income tax. New Jersey historically did not conform but moved to full conformity beginning in 2026. Most other states fully conform. The state-conformity status is part of the planning calculus, particularly for residents of non-conforming states (California, Pennsylvania) considering a pre-sale relocation.