QSBS (Qualified Small Business Stock)

The relief. Under Section 1202 of the Internal Revenue Code, gain on the sale of qualified small business stock held for more than five years is excluded from federal income tax, up to the greater of $10m or ten times the holder’s cost basis in the stock, per issuer. For stock issued after 4 July 2025 the cap rises to $15m, indexed, and the exclusion becomes tiered: 50% after three years, 75% after four, 100% after five.

The conditions. The issuer must be a domestic C corporation with gross assets of no more than $50m ($75m for stock issued after July 2025) at and immediately after issuance; the stock must be acquired at original issue for money, property or services, not bought from another holder; and the company must use at least 80% of its assets in an active qualified trade, which excludes finance, professional services, hospitality and several others. The holder can be an individual, a trust or a fund passing the gain through to its partners.

What it does to structure. An LLC does not issue QSBS, which is one reason accelerators and venture funds insist on a Delaware C corporation before investing. A SAFE or note is not stock, so the five-year clock starts at conversion, not at the date the money was paid. Founders who convert an LLC to a C corporation take the value at conversion as their basis, which can lift the ten-times-basis cap dramatically.