Qualified Small Business Stock (QSBS) 

Qualified Small Business Stock (QSBS) refers to a special classification of stock that offers significant tax advantages to investors under Section 1202 of the U.S. Internal Revenue Code. It applies to shares of a C corporation that meets specific eligibility criteria, providing potential exemptions from capital gains taxes when the stock is sold after being held for a qualifying period. 

To qualify as QSBS: 

• The stock must be issued by a domestic C corporation. 

• The corporation’s gross assets must not exceed $50 million at the time of issuance and immediately after. 

• The corporation must be an active business and not operate in excluded industries (like personal services, finance, or hospitality). 

• The stock must be acquired directly from the company — not from a secondary sale. 

• The investor must hold the stock for at least 5 years to be eligible for tax benefits. 

Under current law, up to 100% of capital gains (subject to a cap) can be excluded from federal taxes upon the sale of QSBS, depending on when the stock was acquired. This makes QSBS an attractive incentive for early-stage investors and founders.