Answering Your Top 10 QSBS Questions

I just received a bid to sell my company, but I’ve only held my stock for 4 1/2 years. Can I still qualify for 1202?

For QSBS qualification, stock issued on or before July 4, 2025, must be held for at least five years. For stock issued after that date, a new tiered system applies. Under the tiered system, a partial exclusion equal to 50% of the full exclusion becomes available after three years, 75% after four years, and the full exclusion becomes available after five years. This phased approach means that qualifying for the maximum benefit depends on both the date your stock was issued and how long you’ve held it. In any case, the clock for the holding period begins when you acquire the stock. In other words, it’s issued to you, you exercise an option, your shares vest, or you make an 83(b) election, just to name a few.

If you acquired the stock on or before July 4, 2025, and don’t qualify for the partial exclusion, you may be able to use a Section 1045 rollover to acquire replacement QSBS within 60 days. The replacement stock must then satisfy the QSBS requirements.¹ If shares are received through an IPO, merger, or reorganization, special rules allow the holding period to tack, subject to limits on the amount of gain eligible for exclusion.^{2, 3}

My company is worth $100 million. Am I disqualified from receiving QSBS eligible stock?

For stock issued on or before July 4, 2025, the issuing corporation’s aggregate gross assets must not have exceeded $50 million at any time before and immediately after issuance in order to qualify for QSBS tax treatment. For stock issued after that date, the threshold is raised to $75 million and will increase with inflation over time.⁴ Gross assets are measured by tax basis not market value.⁵ In other words, the gross asset value of your company may meet this test, even though the fair market value of the company’s stock (or the actual value of its cash and assets) exceeds $75 million.

When growing your business, be mindful of cash injections into the company during various funding rounds. Once the aggregate gross assets breach the inflation adjusted $75 million threshold, any stock issued after that point will no longer qualify for QSBS tax treatment. Companies that currently have less than $75 million in gross assets should look back to ensure that the $75 million threshold in question was not inadvertently breached at an earlier date.

I received an offer to sell my company, but the buyer only wants to buy my company’s assets. Does the sale have to be structured as a stock sale for QSBS qualification?

How a company’s sale is structured is vital in determining whether the transaction will qualify for the QSBS exclusion. QSBS tax treatment is only available when eligible “stock” of the company is sold. If the deal is structured as an “asset” sale, then the gain may not be excluded under Section 1202. In that case, the corporation will have to pay the tax at the corporate level and then any amount distributed to the shareholders may result in a second layer of taxation.⁶

I only own options, but they don’t vest for 3 years. How do I qualify for QSBS tax treatment?

If a company allows you to exercise Non-Qualified Stock Options (NQSOs) before they vest, you can make an 83(b) election within 30 days of receiving the stock. This would start the holding period from the date of exercise for eventually qualifying for the QSBS exclusion.

However, for Incentive Stock Options (ISOs), the IRS has informally stated that an 83(b) election is invalid for regular tax purposes and that the holding period begins when the options would have vested—not when they were exercised.⁷

The company just redeemed my shares. Is that an issue when it comes to QSBS qualification?

Certain redemptions of the stock by the corporation could disqualify QSBS for the shareholder in question, as well as all others.⁸ However, as long as the number of shares redeemed were de minimis, the redemption should not cause any issues. Notably, if more than a de minimis amount of stock is redeemed by the corporation, then all stock—not just the shares that were redeemed—could lose their QSBS status.

My uncle offered to sell me his shares. Do I still qualify for QSBS tax treatment if I hold them for 5 years?

Shares must be issued directly by the company and paid for using money, other property, or as compensation for services provided to such corporation.⁹ Shares can also be received by gift, death, or to a partner from a partnership.¹⁰ However, if shares of eligible QSBS are transferred into a limited partnership, the QSBS status is lost. To qualify for sale of QSB stock received from a partnership, the partner must have been holding their partnership interest on the day the partnership acquired the stock and at all times thereafter.

I own a company that provides “consulting” as part of my business. Do I qualify for 1202?

Possibly—but this is a common gray area.

For QSBS qualification, a company must operate a “qualified trade or business.”¹¹ Certain service businesses—particularly those involving consulting, advisory, or professional services—are generally excluded.

However, eligibility depends on the nature of the company’s activities, not merely how they are labeled. In Private Letter Ruling 202342014, the IRS concluded that a company providing data migration and data management services qualified for 1202, even though its services could be described as “consulting.” The key factor was that the company did not separately bill for advice or counsel; instead, it was compensated solely for delivering and implementing a finished data management solution.

This suggests that businesses whose primary value is the delivery of a product, system, or implemented solution—rather than advice—may still qualify for QSBS tax treatment, even if “consulting” is part of the offering.

If your company provides consulting services, eligibility may depend on factors like:

• Whether clients are paying for advice versus a tangible or implemented outcome
• How services are marketed and described
• How revenue is billed (e.g., advice vs. deliverables)

A detailed review of these facts is often necessary. Importantly, private letter rulings apply only to the taxpayer who requested them and do not establish binding precedent.

Can I take a loan from the company to acquire shares?

Loans made by a company to a founder or employee can help provide much-needed liquidity, but pay special attention to non-recourse loans. According to Treasury Regulations Section 1.83-3(a)(6), when the transferee has no personal “risk of loss” (as a beneficial owner of the property would), no transfer is deemed to have been made. As a result, if a founder or employee takes a non-recourse loan from a company to acquire QSBS eligible stock, no transfer occurs until the loan has been substantially repaid. This impacts the starting point of the 5-year holding period for 1202 eligibility. If an owner seeks a loan to acquire stock or to exercise options, they should pursue one from an outside bank or lender.

Separately, Sarbanes-Oxley—the law passed in 2002 to improve auditing and public disclosures—forbids public company executives or board members from procuring a company loan.

I am considering investing through a Simple Agreement for Future Equity (SAFE). When does the 5-year holding period to qualify for the QSBS exclusion begin?

Be careful when considering a SAFE investment, which allows investors to convert the amount they invested into equity in a future funding round. Although the parties to the transaction may claim that the SAFE will be considered equity, the IRS may not agree. Instead, they may recharacterize the SAFE as a type of prepaid forward. If this occurs, the 5-year holding period for QSBS tax treatment would not start at the SAFE’s acquisition date, but rather when the instrument converted to a fixed number of shares.

I already used some of my $10 million exclusion on previously sold QSB stock but am planning to sell more shares. Can I still receive a tax benefit?

For any taxable year, the amount of QSBS eligible gain a taxpayer may exclude under Section 1202 is the greater of:

• $10 million, reduced by the aggregate amount of Section 1202 gain excluded with respect to that issuer in prior taxable years, or
• 10× the aggregate adjusted basis of the qualified small business stock sold during that taxable year (without regard to prior‑year exclusions).¹²

Because this limitation is applied on a per‑taxable‑year basis, taxpayers may be able to use both the $10 million limitation and the 10× basis limitation across multiple years.

Consider the following example:

I acquired 1,000 shares that met the requirements for QSBS qualification in 2014 when I contributed $2.0 million to the company. I sold 30% of those shares in 2019 for $8.0 million, which was tax free, and am now selling the remaining 70% for $14 million. Do I owe tax on the $14 million second sale?

When the initial 300 shares were sold for $8.0 million, you were able to exclude the greater of $10.0 million or $6.0 million (10 times your adjusted basis of $0.6 million for the shares sold). Thus, the initial $7.4 million was excluded from gains as part of the cumulative limitation. When you later sell the remaining 700 shares for $14 million, you are able to exclude the greater of $2.6 million ($10.0 million minus $7.4 million of prior year gains) or $14.0 million (10 times your adjusted basis of $1.4 million of the shares sold). Therefore, all $14.0 million may be excluded from gains as you can consider the gains in the given year.