Legal & Compliance
QSBS
Last updated
Quick Answer
Qualified Small Business Stock — a tax exclusion allowing founders and investors to exclude up to $10M (or 10x basis) of capital gains on qualifying startup investments.
QSBS (Qualified Small Business Stock) under Section 1202 of the Internal Revenue Code allows non-corporate investors to exclude 100% of federal capital gains (up to $10M or 10x the original investment, whichever is greater) on gains from qualifying C-corporation stock held for more than 5 years. To qualify: the company must be a domestic C-corp, have gross assets under $50M at time of issuance, operate in a qualified trade or business (software, tech, most startups qualify — professional services typically don't), and the investor must acquire stock at original issuance. For founders holding large equity stakes, QSBS can save tens of millions in taxes. QSBS stacking strategies allow family members to each claim the exclusion. Consult a tax attorney early — missing QSBS qualification has significant consequences.
Related Concepts
Further Reading
The Tax Benefits of Angel Investing: QSBS Explained
How Section 1202 QSBS can exclude up to $10 million in capital gains from angel investments — the requirements, holding periods, and how this tax benefit dramatically changes the return math.
Secondary Sales for Startup Founders: When and How to Sell Shares
Founder secondary sales let you convert paper equity into real liquidity before an exit. Learn when to sell startup shares, how to structure the transaction, and what pitfalls to avoid.
Comparisons
Frequently Asked Questions
What is QSBS in venture capital?
QSBS (Qualified Small Business Stock) under Section 1202 of the Internal Revenue Code allows non-corporate investors to exclude 100% of federal capital gains (up to $10M or 10x the original investment, whichever is greater) on gains from qualifying C-corporation stock held for more than 5 years.
Why is QSBS important for startups?
Understanding QSBS is critical for founders navigating the fundraising process. It directly impacts deal terms, valuation, and the relationship between founders and investors.
What category does QSBS fall under in VC?
QSBS falls under the legal category in venture capital. This area covers concepts related to the legal frameworks and compliance requirements in venture capital.
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