The short answer: The Qualified Small Business Stock (QSBS) exclusion under §1202 lets startup founders, early employees, and angel investors exclude a significant portion of their stock gains from federal income tax when they sell. The One Big Beautiful Act increased the exclusion limit from $10 million to $15 million and raised the qualifying company asset threshold from $50 million to $75 million. Both are indexed for inflation going forward.
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QSBS is a federal tax incentive specifically designed to encourage investment in startups and small businesses. Here's the basic structure:
"There was a lot of fear that they were going to get rid of QSBS entirely. Instead they made it bigger and better. $10 million became $15 million. The asset threshold went from $50 million to $75 million. And both numbers are now indexed for inflation, so they'll grow over time. The people this helps are startup founders, angel investors, and employees that get stock options and ISOs when they start working for a startup. These startup tech people are super happy."
If you started a C-corporation with gross assets under $75 million and you've held your founder shares for 5+ years, your first $15 million in gain on the sale is tax-free at the federal level. For a company acquired for $30 million where your basis is near zero, that could mean zero federal tax on the entire transaction.
Employees who receive Incentive Stock Options (ISOs) or Non-Qualified Stock Options (NQOs) that result in qualifying C-corporation stock may be eligible — but the rules differ by option type and require careful timing. The key is that the stock must qualify under §1202 at the time of acquisition and the 5-year holding period must run from the date of exercise (when you actually receive the stock).
Angel investors who invest in qualifying C-corporations at a stage when gross assets are under $75 million, and who hold their shares for 5 years, can use the QSBS exclusion on gains up to $15 million.
The company must be a domestic C-corporation (not an LLC, S-corp, or partnership). It must be engaged in a qualifying trade or business. The "specified service" exclusions that apply to the QBI deduction also apply here:
⚠ The QSBS exclusion does not apply to stock in companies operating in professional services fields including health, law, engineering, accounting, financial services, brokerage services, or performing arts. If you're a doctor, lawyer, accountant, or financial advisor starting a practice as a C-corp, your stock does not qualify for §1202 treatment.
Tech companies, software companies, biotech, manufacturing, retail, and most other industries generally qualify. The exclusion was designed specifically for the innovative high-growth startup economy.
The $15 million exclusion is per taxpayer per company. Each founder can exclude up to $15 million in gain from the same company's stock. A married couple filing jointly, where both spouses hold qualifying QSBS separately, can each use the $15 million exclusion — potentially $30 million in combined tax-free gain from the same company exit.
There's also an alternative limit based on 10 times your basis in the stock — if you invested $2 million, you can exclude up to $20 million in gain under the 10x rule, regardless of the $15 million cap.
Romeo knows the QSBS rules in detail — including the holding period requirements, the company qualification criteria, and the state non-conformity issues that can eliminate the benefit if not planned for.
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