Qualified Small Business Stock (QSBS)
Stock that qualifies for the capital gains exclusion under Internal Revenue Code § 1202; substantially expanded by the One Big Beautiful Bill Act of 2025 to include tiered exclusions for shorter holding periods.
Qualified Small Business Stock (QSBS) is stock that meets the requirements of Internal Revenue Code § 1202, qualifying its holder for a capital gains exclusion at sale. To qualify, the stock must be (1) issued by a domestic C corporation, (2) issued to a non-corporate taxpayer, (3) acquired at original issuance directly from the corporation in exchange for money, property other than stock, or services, (4) issued by a corporation whose aggregate gross assets do not exceed the relevant threshold immediately before or after issuance, and (5) issued by a corporation that conducts a qualified trade or business under the active business requirement (at least 80% of assets used in a qualified trade, with specific service businesses excluded under § 1202(e)(3)).
Pre-OBBBA rules (stock issued through July 4, 2025)
Under the rules in effect before the One Big Beautiful Bill Act, QSBS held for more than five years qualified for a 100% federal capital gains exclusion (for stock acquired after September 27, 2010). The per-issuer gain cap was the greater of $10 million or 10 times adjusted basis. The aggregate gross assets ceiling was $50 million immediately before or after issuance.
Post-OBBBA rules (stock issued after July 4, 2025)
The One Big Beautiful Bill Act (P.L. 119-21), signed July 4, 2025, substantially expanded Section 1202 for QSBS issued after that date. The post-OBBBA regime introduced tiered exclusions (50% at 3 years, 75% at 4 years, 100% at 5+ years), raised the per-issuer gain cap from $10 million to $15 million (indexed for inflation from 2027), and raised the aggregate gross assets ceiling from $50 million to $75 million (also indexed). Pre-OBBBA QSBS continues to be governed by the original rules; the IRS does not allow stock to be "refreshed" into the new regime through restructuring.
Texas conformity
Texas conforms to federal Section 1202 treatment because Texas does not impose a state income tax. The federal exclusion is therefore the effective exclusion for Texas-resident taxpayers, in contrast to non-conforming states (including California, Pennsylvania, New Jersey, Mississippi, and Alabama) where state income tax applies to QSBS gain regardless of the federal exclusion.