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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.

What it is

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.

Operational context

What good looks like

  • The term is tied to a real workflow, not just a definition.

  • Ownership, timing, and evidence are clear.

  • The reader can tell what decision the concept supports.

  • Related terms point to the next useful explanation.

Related tools and reading

Term Family

Related concepts

Common Stock

Further Reading

How Secondary Sales Work for Startup Employees: Selling Your Shares Before an IPO

Your startup equity doesn't have to be locked up until an IPO or acquisition. Secondary markets let employees sell shares early — but the process is complex, company approval is usually required, and the tax implications are significant.

Comparisons

QSBS vs Ordinary Capital Gains

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.

Sources & References

  1. 1.Wikipedia

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