A federal tax exclusion allowing investors and founders to exclude up to 100% of capital gains on qualified C-Corp stock held for more than five years.
QSBS (Qualified Small Business Stock), governed by Section 1202 of the IRS tax code, allows investors and founders in eligible C-Corporations to exclude up to 100% of capital gains when they sell their shares — potentially tax-free gains of up to $10 million (or 10x their basis, whichever is greater) per person.
To qualify, the stock must be in a domestic C-Corporation (not an LLC or S-Corp) that was a "qualified small business" at the time of issuance — meaning it had gross assets under $50 million and was engaged in an active trade or business (not investment, finance, or professional services). The stock must be held for more than five years, and you must be the original purchaser.
QSBS is one of the most valuable tax benefits available to startup founders and early investors, but it's also complex. Small missteps — like converting from an LLC to a C-Corp without proper planning, or exceeding the asset threshold — can disqualify the stock. If QSBS benefits might be significant for you (they often are for founders in venture-backed companies), consult a tax attorney who specializes in startups before any transactions that might affect eligibility.