What is QSBS and how much gain can you exclude in 2026?

QSBS is Qualified Small Business Stock under IRC Section 1202. If you hold qualifying stock long enough, you can exclude a large share of the gain from federal capital gains tax — up to the greater of $15 million or 10 times your basis, per company, for stock acquired after July 4, 2025. For stock acquired on or before that date, the cap is $10 million or 10 times basis. The exclusion can be 100%, eliminating federal tax on the gain entirely.

What did the One Big Beautiful Bill change about Section 1202 QSBS?

The OBBBA, enacted in 2025, made three major changes for QSBS acquired after July 4, 2025. First, it introduced a tiered exclusion: 50% of the gain is excluded at a 3-year hold, 75% at 4 years, and 100% at 5 years — previously you got nothing before 5 years. Second, it raised the per-issuer exclusion cap from $10 million to $15 million, now indexed to inflation. Third, it raised the company's aggregate gross-assets ceiling from $50 million to $75 million, so larger startups can still issue QSBS.

What are the requirements to qualify for the QSBS exclusion?

The stock must be in a domestic C corporation that had aggregate gross assets of $75 million or less (for stock issued after July 4, 2025) at the time the stock was issued; you must have acquired the stock at original issuance (not on the secondary market) in exchange for money, property, or services; the company must use at least 80% of its assets in an active qualified trade or business (most professional-services, finance, hospitality, and farming businesses are excluded); and you must meet the holding-period tiers. Gain that exceeds the exclusion is taxed at a 28% rate, not the usual 20%.

Does the QSBS exclusion apply to state taxes?

Not always. Section 1202 is a federal provision. Most states that have an income tax conform to it and follow the federal exclusion, but a few — notably California, and historically others — do not conform and will tax the full gain at the state level even when it is federally excluded. Check your state's conformity before assuming the gain is entirely tax-free.

QSBS in 2026: How Founders and Early Employees Can Pay $0 Tax on Startup Stock

The Headline: $0 Tax on $15M

There's a provision in the tax code that lets a startup founder walk away from an exit with up to $15 million of gain — completely free of federal tax. Not deferred. Not at a lower rate. Zero. It's Section 1202, and for years it was the best tax break almost nobody outside Silicon Valley and a few law firms talked about.

That changed in 2025. The One Big Beautiful Bill didn't just keep QSBS — it made it dramatically more generous, and more accessible. If you're a founder, an early employee with founder-grade stock, or an angel investor, the math on when to sell just got rewritten. Let's go through it.

§ 01What the OBBBA Changed in 2025

For stock acquired after July 4, 2025, three things moved, and all three moved in your favor:

A tiered exclusion replaced the all-or-nothing 5-year cliff. You no longer have to wait the full five years to get anything.
The per-company cap rose from $10 million to $15 million — and it's now indexed to inflation, so it'll climb over time.
The company-size ceiling rose from $50 million to $75 million in aggregate gross assets, meaning bigger, later-stage startups can still issue qualifying stock.

That last one matters more than it looks. Plenty of fast-growing companies blew past the old $50 million asset cap before they'd issued stock to later hires. Lifting it to $75 million pulls a whole tier of growth-stage employees into QSBS eligibility who'd have missed it before.

§ 02The New Tiered Exclusion

Under the old rule, QSBS was a cliff: hold five years, exclude 100%; sell at four years and eleven months, exclude nothing. Brutal, and it locked founders into holding through windows they'd rather have exited.

The new tiers, for post–July 4, 2025 stock:

Holding period	Gain excluded
At least 3 years	50%
At least 4 years	75%
At least 5 years	100%

So a three-year hold now shields half the gain. The catch: whatever portion isn't excluded is taxed at a flat 28% rate — higher than the normal 20% top long-term rate — and a slice of the excluded gain can be an Alternative Minimum Tax preference item for the partial tiers. So the 100% five-year exclusion is still the prize; the 50% and 75% tiers are an escape hatch, not the destination.

§ 03Who Actually Qualifies

QSBS is generous but fussy. Every box has to be checked:

Domestic C corporation. Not an LLC, not an S corp, not a partnership. This is why startups planning to raise venture money incorporate as Delaware C corps early — it's a prerequisite for QSBS.
Original issuance. You have to have gotten the stock straight from the company — for cash, property, or services — not bought it on the secondary market. Exercised options and founder shares count; shares you bought from another shareholder don't.
The company was small when it issued. Aggregate gross assets of $75 million or less at the time of issuance (for post–July 2025 stock). A company can grow far beyond that later; what matters is its size when your shares were created.
Active qualified business. At least 80% of assets used in an active trade or business. Excluded: most professional services (law, health, consulting, accounting), finance, banking, insurance, farming, hospitality, and any business where the principal asset is the reputation or skill of employees. Software, products, and most tech qualify.

Miss any one of these and the whole exclusion evaporates. This is the part where you genuinely want a tax advisor confirming eligibility before you sell — ideally before you even take the shares.

§ 04The $15M (or 10× Basis) Cap

The exclusion is capped, per company, at the greater of:

$15 million (for post–July 2025 stock; inflation-indexed going forward), or
10 times your basis in the stock.

The 10× basis alternative is the sleeper. If you paid real money for your shares — say you invested $3 million as an angel — your cap is 10 × $3M = $30 million, well above the flat $15 million. Founders who paid fractions of a cent for founder stock will be governed by the $15 million figure; investors who put serious capital in can shield far more through the 10× door.

Gain above the cap doesn't vanish — it's a normal long-term capital gain (or 28% to the extent it's QSBS-related), and you can run it through the capital gains calculator to see the bill on the excess.

§ 05Old Stock vs. New Stock

The July 4, 2025 line is a hard fork. Stock you acquired on or before that date plays by the old rules: $10 million cap, $50 million company-asset ceiling, and the full five-year hold for any exclusion at all. Stock acquired after gets the $15 million cap, $75 million ceiling, and the 3/4/5-year tiers.

When your shares were issued now determines which rulebook your exit follows.

If you're mid-vest or about to exercise options, the acquisition date of each tranche matters. There can be real value in how and when you take shares — another reason to map this with an advisor rather than guess.

§ 06Stacking and Packing

The cap is per taxpayer, per company. That opens two advanced moves the wealthy have used for years:

Stacking. Gift QSBS shares to other taxpayers — adult children, non-grantor trusts — before a sale. Each recipient gets their own $15 million exclusion on the same company's stock. A founder with a large position and a good estate-planning lawyer can multiply a single $15 million cap several times over.

Packing. Increase your basis (for example, by contributing appreciated property at incorporation) to push up the 10×-basis alternative cap. Niche, but powerful for the right situation.

These are sophisticated, paperwork-heavy strategies with real anti-abuse limits — not DIY territory. But they're the reason QSBS shows up in nearly every serious startup-founder estate plan.

§ 07Key Takeaways

QSBS can wipe out federal tax on up to $15M of gain per company — or 10× your basis if that's larger.

The OBBBA added 3/4/5-year tiers (50/75/100%) for stock acquired after July 4, 2025, plus a higher cap and a $75M company-size ceiling.

Eligibility is strict — C corp, original issuance, qualified active business, size limits at issuance — and unexcluded QSBS gain is taxed at 28%.

Watch state conformity (California notably doesn't follow it) and confirm eligibility with a professional before you sell.

For everything around the QSBS exclusion — the ordinary rates, NIIT, and how a partial gain is taxed — see the 2026 capital gains guide and model your numbers in the calculator.

Sources: IRC §1202 (qualified small business stock); One Big Beautiful Bill Act (2025) amendments to §1202; The Tax Adviser, Holland & Knight, and Plante Moran OBBBA/QSBS analyses (2025). General information, not tax or investment advice.