QSBS: the tax break that can make a startup exit (mostly) tax-free

Section 1202 lets qualifying founders and investors exclude a huge chunk of gain when they sell. The 2025 tax law made it better.

If you’re building a C corporation and hoping for an exit someday, Qualified Small Business Stock (QSBS) might be the most valuable tax rule you’ve never looked at. It can let you exclude millions of dollars of gain from federal tax when you sell.

The basics

To qualify, generally:

It has to be a C corporation. Not an LLC, not an S-corp.
You got the stock at original issuance, directly from the company (for cash, property, or services), not by buying it from someone else.
The company was small when it issued the stock. Its gross assets had to be under a cap at issuance.
The company runs an active, qualifying business. Many service businesses are excluded, including fields like law, accounting, health, consulting, and financial services. Most software and product startups qualify.
You hold the stock long enough (more on that below).

What changed in 2025

The tax law signed in July 2025 improved QSBS for stock issued after July 4, 2025:

Partial exclusion sooner: 50% of the gain after 3 years, 75% after 4 years, and 100% after 5 years.
A bigger cap: the per-company exclusion went from $10 million to $15 million (or 10x your basis, if that’s larger), indexed for inflation in later years.
Bigger companies qualify: the gross-asset limit went from $50 million to $75 million.

Stock issued before that date still follows the old rules: you need the full 5 years, and the cap is $10 million.

Why it matters early

Most of what decides QSBS happens at formation and early fundraising, long before anyone talks about an exit: your entity type, when and how stock was issued, and what the company does. Converting an LLC to a C-corp later can work, but the details matter.

What to do now

If you’re a C-corp, keep clean records of when each share was issued and what was paid for it.
If you’re deciding between an LLC and a C-corp and you plan to raise venture money, QSBS belongs in that conversation.
Don’t assume you qualify. Some states don’t follow the federal exclusion, and the “qualified business” test trips people up.

This is a high-stakes area where specifics matter a lot. If you think QSBS applies to you, talk to us before you make big structural moves.