What is Qualified Small Business Stock (QSBS)?
A US tax provision that can exclude much of the capital gain on qualifying startup stock - if strict rules are met.
Qualified Small Business Stock (QSBS): definition
QSBS is one of the most valuable tax benefits available to founders and early employees. If stringent conditions are satisfied - a domestic C-corporation, gross assets under a threshold when the stock was issued, an active qualifying business, original issuance of the stock, and a five-year holding period - a large share of the capital gain on sale can be excluded from federal income tax, up to a cap. The rules are technical and easy to break, so eligibility must be tracked carefully.
- Stock must be in a qualifying domestic C-corporation
- Company gross assets under the statutory threshold at issuance
- Stock acquired at original issuance, held at least five years
- Business must be an active qualifying trade (some sectors excluded)
How Fintra handles it
Fintra equity management records issuance dates, holding periods, and share classes on the cap table, which are the facts QSBS analysis depends on - when stock was originally issued and how long it has been held. This gives founders and advisors the clean records needed to assess eligibility, though whether stock actually qualifies is a tax determination for a professional.
- Issuance dates and holding periods tracked per shareholder
- Share class and original-issuance facts recorded on the cap table
- Clean records to support a QSBS eligibility review with an advisor
Worked example
Frequently asked questions
What are the main requirements for QSBS?
The stock must be in a domestic C-corporation whose gross assets were under the statutory threshold when the stock was issued, acquired at original issuance, held for at least five years, and the company must run an active qualifying business. Certain industries - like many professional services - are excluded.
How much gain can QSBS exclude?
Section 1202 can exclude a large percentage - up to 100% for stock acquired in qualifying periods - of the capital gain, subject to a per-issuer cap (a dollar limit or a multiple of basis). The exact exclusion depends on when the stock was acquired and the applicable rules.
Why is the five-year holding period important?
The full QSBS exclusion generally requires holding the stock for at least five years from issuance. Selling earlier forfeits the benefit (though some rollover relief may apply). Tracking the acquisition date precisely is essential, which is why accurate cap-table records matter.
Do stock options qualify for QSBS?
The holding period and original-issuance test generally start when you actually acquire the shares - for options, when you exercise them, not when they are granted. This affects the timing of the five-year clock. QSBS analysis is complex, so consult a tax professional about your specific situation.
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