QSBS Requirements for Founder and Employee Stock

What are the QSBS requirements before and after July 5, 2025?

The date you acquired the shares decides which rules apply. Public Law 119-21 created a second set of rules for qualified small business stock acquired after July 4, 2025; shares acquired on or before that date keep the old rules (Public Law 119-21, section 70431).

A case is not simple when you hold shares from both sides of the date, unvested shares with no 83(b) election, shares from a SAFE or convertible note, shares you received by gift, or shares in a company that raised a large round or bought back stock. Each changes the date, the cap or whether the stock qualifies at all.

Gather: the stock certificate or cap table entry, the issue date, the price you paid, any 83(b) election, option exercise or RSU settlement records, and the company's written statement that the stock qualified when issued.

What does QSBS exclude, and who can claim it?

QSBS lets a holder that is not a corporation leave part or all of the gain on selling qualified small business stock out of gross income under section 1202. Individuals, trusts and estates can claim it; a corporation that holds the stock cannot.

A partner or S corporation shareholder can claim the exclusion on QSBS the entity sells only if they held their interest on the day the entity bought the stock and at all times after (Schedule D instructions). The exclusion covers gain only; a loss on the shares follows the normal rules, covered in deducting shares in a failed startup.

Which QSBS tests are yours, and which belong to the company?

You prove how you got the shares and how long you held them; the company proves what it was when it issued them and how it ran during your holding period (section 1202(c) to (e)).

Stock bought from another shareholder, including in a secondary sale, is not acquired at original issue and does not qualify in your hands. The company's tests, its records and its statement to investors are covered in the QSBS attestation guide. A startup that began as an LLC has its own rules for when the clock starts and what basis counts; see LLC or C corporation. Raised cash held in Treasury bills can test the company's active business requirement; see interest on a startup's raised cash.

QSBS holding period: how much is excluded after 3, 4 or 5 years?

For shares acquired after July 4, 2025, you exclude 50% of the gain after at least 3 years, 75% after at least 4 and 100% after 5 or more (section 1202(a)(5), added by Public Law 119-21). Sold in under 3 years, the shares get no exclusion.

No share acquired after July 4, 2025 can reach the 3-year mark before July 2028. A sale before then of newer shares gets no exclusion; the QSBS relief left is a section 1045 rollover after a holding period of more than 6 months, covered in rolling over QSBS gain. The gain is long-term once you have held the shares more than one year, whether or not QSBS applies.

What rules apply to shares acquired before July 5, 2025?

Shares acquired on or before July 4, 2025 need a holding period of more than 5 years, with no 3- or 4-year tiers. Their excluded share depends on the acquisition date (Schedule D instructions):

These shares keep the $10,000,000 cap. The higher $75,000,000 gross-assets limit applies only to stock issued after July 4, 2025, so stock issued earlier still needed the company at or under $50,000,000 when issued.

Your acquisition date is the first day you held the shares after applying the holding-period rules of section 1223 (section 1202(a)(6)(B)). A gift or a stock-for-stock conversion therefore does not move older shares into the newer rules.

What is the QSBS exclusion limit per company?

The cap is the greater of a dollar amount or 10 times the basis of the shares of that company you sell in the year (section 1202(b)). The dollar amount is $10,000,000 for shares acquired on or before July 4, 2025 and $15,000,000 for shares acquired after; it applies per company, over your lifetime, not per year.

• Both kinds at one company share one cap. Gain counted on any shares of that company in earlier years reduces both dollar amounts, and gain counted on older shares in the same year reduces the newer one (Public Law 119-21, section 70431(b)). Older shares never use more than $10,000,000.
• The cap counts gain taken into account, not gain excluded. A sale at the 3-year tier uses up cap on the full gain counted, even though only 50% of it is excluded.
• 10 times basis helps when you paid real money or contributed property. Founders who paid a nominal price usually rely on the dollar cap. Basis for this test ignores additions after issue, and property contributed for stock counts at its value when contributed.
• Married couples: a joint return applies one dollar amount per company, and the gain counted on it is split equally between the spouses for later years (section 1202(b)(3)). Married filing separately, the dollar amount is $5,000,000 for older shares and $7,500,000 for newer ones.
• Inflation: the $15,000,000 amount is indexed for tax years beginning after 2026, but once your newer-share gain at a company exceeds the dollar amount in a year, your later dollar amount at that company is zero; 10 times basis can still apply.

Do shares from stock options, early exercise or RSUs qualify for QSBS?

Yes, if the company issued the shares to you for services or for the exercise price and passed its tests on the day it issued them. The clock starts when you acquire the shares, not when you received the option or RSU (26 CFR 1.83-3(a)(2) and (e)).

The holding-period rules are in 26 CFR 1.83-4(a); conversions keep the original period under section 1202(f). The company's gross-assets test is applied when the shares are issued, so options exercised after the company has grown past the limit do not produce QSBS, even if the option was granted earlier.

Unvested shares granted on or before July 4, 2025 that vest after it, with no 83(b) election, raise a question the statute and regulations do not settle: which set of rules applies to each tranche. Have that reviewed before you count on the newer tiers. For the 83(b) decision itself, see early exercise of startup stock options; for the tax at exercise, see exercising startup stock options. A SAFE bought before July 5, 2025 and converted after it is also unsettled; see SAFEs and convertible notes.

Do QSBS shares you give to family keep the exclusion?

Yes. Shares transferred by gift or at death keep their QSBS status, and the recipient is treated as having acquired them the way you did and held them for your holding period (section 1202(h)).

The recipient takes the gifted shares' acquisition date, so a gift of older shares stays under the older rules. Each holder applies the per-company cap to their own gain (a married couple filing jointly shares one), which is why gifts to family members and trusts come up in planning. The statute lets Treasury write rules against avoidance; whether a particular trust holds up is legal work.

What part of a partial QSBS exclusion is still taxed, and at what rate?

Under a 50% or 75% exclusion, the part of the gain within the cap that is not excluded is "section 1202 gain," taxed at your ordinary rate but no more than 28% (26 U.S.C. 1(h)(4) and (7)). Gain above the cap is ordinary long-term capital gain, taxed at up to 20%.

Net investment income tax of 3.8% applies only to gain included in income (section 1411(c)), so it can apply to the taxed parts above when your income exceeds the threshold. For stock acquired after September 27, 2010, the excluded part is not an alternative minimum tax preference (Public Law 119-21, section 70431(a)(4)). States set their own rules; see state tax on QSBS gains.

How do you claim the QSBS exclusion on your return?

Report the full sale on Form 8949, Part II, enter code Q in column (f) and the excluded amount as a negative number in column (g) (Form 8949 instructions). The net gain then flows to Schedule D.

If you complete Schedule D line 18, its worksheet in the instructions picks up the taxed part: enter the full exclusion when you excluded 50% of the gain, one-third of it when you excluded 75%, and nothing when you excluded 100% (Schedule D instructions). A sale of non-traded QSBS paid over more than one year is an installment sale on Form 6252, with the exclusion spread over the payments. No IRS form certifies QSBS; keep the records listed above in case the exclusion is examined.

Example

These examples are illustrative and use US dollars. They assume the company met its tests and ignore state tax.

Founder shares sold after 4 years

A founder receives vested shares (or unvested shares with an 83(b) election) in September 2025 and sells in October 2029 for a gain of $8,000,000.

• September 2028: 3 years held, 50% tier reached.
• September 2029: 4 years held, 75% tier reached.
• October 2029: sale. $6,000,000 is excluded. The other $2,000,000 is section 1202 gain, taxed at no more than 28%, plus net investment income tax if income is over the threshold.

Waiting until September 2030 would have reached the 100% tier.

Employee options exercised before the change

An employee exercises vested options in March 2024 and sells the shares in 2030 for a gain of $6,000,000. The shares are older stock: the company needed gross assets of $50,000,000 or less when it issued them at exercise. Held more than 5 years and acquired after September 27, 2010, the whole $6,000,000 is excluded, within the $10,000,000 cap. A sale in January 2029, under 5 years, would have excluded nothing.

Founder gain above the cap

A founder paid $1,000 for shares acquired after July 4, 2025, holds them 5 years and sells for a gain of $40,000,000. Ten times basis is $10,000, so the dollar cap applies. Using $15,000,000 for illustration (the sale-year amount will be higher once indexing starts after 2026), $15,000,000 is excluded; the other $25,000,000 is long-term capital gain at up to 20%, plus net investment income tax.

Different for you?

• You are not sure the company passed its tests: the company's side is in the QSBS attestation guide.
• You started as an LLC or are converting: see LLC or C corporation.
• You live in a state that may tax the gain: see state tax on QSBS gains and moving before selling startup shares.
• You are selling before the holding period ends: see rolling over QSBS gain.
• The company is being acquired or merged: see taxes when your startup is acquired.
• The company is buying back shares or running a tender offer: see selling startup shares in a tender offer.
• Your shares came from a SAFE or convertible note: see SAFEs and convertible notes.
• You live in Canada: see Canadian founder selling US startup shares, or holding startup shares through a Canadian holding company.
• You hold shares from both sides of July 4, 2025, unvested shares without an 83(b), or gain near the cap: get individual tax help before you sell.