QSBS rules in 2026: the $15M exclusion, 3-5 year hold and who qualifies
Under the QSBS rules as of October 2026, stock issued after July 4, 2025 can exclude 50% of its gain from federal tax after three years, 75% after four and 100% after five, up to a cap of $15 million per issuer. Stock issued on or before that date keeps the older rules: a five-year hold, a 100% exclusion and a $10 million cap. The rules sit in Section 1202 of the Internal Revenue Code, as amended by the 2025 budget law (Public Law 119-21, the "One Big Beautiful Bill Act").
This is a general explainer, not tax or legal advice. Whether a particular share qualifies depends on facts about the company and the holder, so check with a tax adviser.
What QSBS is
Qualified small business stock (QSBS) is stock in a U.S. C corporation that meets several tests at issuance and during the holding period. If it qualifies and the holder sells after the required time, part or all of the gain is excluded from federal income tax. For founders, early employees and angel investors in venture-backed startups, it is one of the largest tax benefits available.
This guide covers the federal rules only.
What changed in 2025
Before the 2025 law, the benefit was all or nothing for most stock: hold for more than five years and the exclusion was 100%, sell earlier and there was no exclusion. The amended statute adds shorter holding periods and raises both dollar limits for newly issued stock.
Old rules and new rules side by side
- Stock issued on or before July 4, 2025: 100% exclusion after five years; per-issuer cap of the greater of $10 million (less earlier eligible gain from that issuer) or 10 times the holder's basis; issuer gross assets of no more than $50 million.
- Stock issued after July 4, 2025: 50% exclusion at three years, 75% at four years, 100% at five years or more; cap of the greater of $15 million (less earlier eligible gain) or 10 times basis; issuer gross assets of no more than $75 million.
The statute's text puts the stock acquired after the "applicable date" of July 4, 2025 on the new schedule. A summary from law firm Foley describes the same split, with the new tiers applying to stock acquired from July 5, 2025.
Inflation indexing
The $15 million cap is adjusted for inflation for taxable years beginning after 2026, so it stays at $15 million for 2025 and 2026 and can rise from 2027. The statute also provides an inflation adjustment for the $75 million gross-asset figure. Check the current adjusted numbers before relying on a specific amount for a later year.
Who and what qualifies
To count as qualified small business stock, the shares and the company must pass each of these tests.
1. Domestic C corporation
The issuer must be a domestic C corporation, and it must stay one during substantially all of the holder's holding period. LLCs and S corporations taxed as pass-through entities do not qualify unless they convert to a C corporation.
2. Original issuance
The holder must acquire the stock directly from the company (or through an underwriter at original issue), in exchange for money, other property that is not stock, or as pay for services. Shares bought from another shareholder on a secondary market generally do not qualify, though some transfers by gift, inheritance or partnership distribution are handled by separate rules in the statute.
3. Gross assets of $75 million or less
The company's aggregate gross assets, meaning cash plus the adjusted tax basis of other property, must not exceed $75 million at any time before the stock is issued and immediately afterward, counting the money raised in that issuance. Companies in a parent-subsidiary group are measured together. The test is run at issuance, so a company that later grows far beyond the limit does not lose QSBS status for shares already issued.
4. The active business test
During substantially all of the holding period, at least 80% of the company's assets by value must be used in the active conduct of one or more qualified trades or businesses. Other limits apply to holdings of portfolio securities and to real property that is not used in the business, and money held as reasonable working capital can count toward the 80%, but once the company is two years old no more than 50% of its assets can qualify on that basis.
5. Not an excluded field
The statute lists businesses that cannot be qualified trades or businesses:
- services in health, law, engineering, architecture, accounting, actuarial science, performing arts, consulting, athletics, financial services or brokerage;
- any business whose main asset is the reputation or skill of one or more employees;
- banking, insurance, financing, leasing and investing;
- farming;
- mining and other natural resource extraction that qualifies for depletion deductions;
- hotels, motels, restaurants and similar businesses.
Software, hardware and most AI product companies are generally not on that list, but a company that sells mostly consulting hours can be. Borderline cases are common, so founders normally get a written view from counsel before relying on the status.
6. Limits on stock buybacks
Stock is not qualified if the company bought stock from the holder or a related person in the four-year window running from two years before to two years after issuance. A broader test disqualifies stock if the company repurchased more than 5% of the aggregate value of all its stock during the two-year period starting one year before issuance. Founder secondary sales to a new investor are a common trigger to review.
How the holding periods and the cap work
For post-July 4, 2025 stock, the exclusion percentage is set by how long the stock was held when sold: three years for 50%, four years for 75%, and five years for 100%. Selling at three years and eleven months, for example, would still produce the 50% result.
The cap is the greater of two amounts for each issuer: the dollar limit ($15 million for new stock, reduced by gain already excluded from that issuer in earlier years) or 10 times the total adjusted basis of that issuer's stock the holder sold in the year. Married taxpayers filing separately get half of each dollar limit ($5 million for old stock, $7.5 million for new stock). The cap is applied per taxpayer and per issuing company.
What this means for startup stock
- Founders who incorporated as a C corporation and received shares at formation typically start their clock at issuance. The date shares were issued, not the date the idea began, is what counts.
- Employees with stock options generally start the clock when they exercise and receive shares, not when options are granted.
- Angels and funds buying newly issued preferred or common shares in a priced round are the main audience for the rules. Holdings through a partnership are subject to extra rules.
- Converted entities: companies that begin as LLCs and convert to C corporations should be reviewed carefully, because the company's assets at the time of issuance count toward the $75 million test.
Many states set their own tax rules and some do not follow the federal exclusion in full, so check your state's tax agency rather than assuming the federal result applies.
For related reading on how startups raise money, see our funding coverage and the founders section. Founders weighing early capital options can also read about a16z speedrun deal terms and the accelerator application deadlines.
Frequently asked questions
What are the new QSBS rules?
For stock issued after July 4, 2025, the federal exclusion is 50% after three years, 75% after four years and 100% after five years. The per-issuer cap rises to $15 million and the company's gross asset limit to $75 million.
Do the new QSBS rules apply to stock I already own?
Only if it was issued after July 4, 2025. Stock issued on or before that date stays under the old rules with a five-year hold, a $10 million cap and a $50 million asset limit.
Can an LLC or S corporation issue QSBS?
No. The issuer must be a domestic C corporation during substantially all of the holding period. An LLC that converts to a C corporation can issue qualifying stock after the conversion if it meets the other tests.
What is the QSBS exclusion limit?
For new stock, it is the greater of $15 million per issuer, less gain already excluded, or 10 times the holder's basis in the stock sold. The $15 million figure is indexed for inflation for taxable years after 2026.
Which businesses cannot issue QSBS?
Excluded fields include health, law, accounting, consulting, financial services, banking, insurance, farming, hotels and restaurants, and businesses that depend mainly on employee reputation or skill.