FAQs on QSBS: Is Your Business Eligible?

Are you a founder, investor or executive wondering if your business qualifies for powerful tax savings under the Qualified Small Business Stock (QSBS) rules? With recent updates from the 2025 One Big Beautiful Bill Act, commonly referred to as the OBBBA or OB3, understanding your eligibility and maximizing your benefits is more important than ever. This FAQ breaks down the essentials to allow you to make informed decisions and unlock the full potential of QSBS for your company and shareholders.

IRC Section 1202 allows business owners to exclude capital gain from gross income when selling QSBS. If you hold the stock for more than five years, you can exclude up to $10 million in gain — increased to $15 million under the 2025 OB3 for stock issued on or after July 5, 2025 — or 10 times your original investment basis, whichever is greater.

Your business must be a C corporation with aggregate gross assets of $50 million or less (increased to $75 million under OB3 for stock issued on or after July 5, 2025) when the stock was issued. Among other requirements, the company must conduct an active trade or business, and at least 80% of its assets must be used in qualifying business activities. Certain industries, like professional services, banking and hospitality, are excluded.

You must acquire the stock directly from the company (not from another shareholder) in exchange for money, property (other than stock) or services (other than underwriting services). The stock must be held for specific time periods:

The OB3, enacted on July 4, 2025, made three major changes to the QSBS rules, all of which apply only to stock issued on or after July 5, 2025:

Most startups qualify for QSBS, as they typically start with minimal assets and grow their business operations over time. The key is ensuring your startup is structured as a C corporation and remains under the $75 million asset threshold when issuing stock. Many Series A and even Series B funding rounds can still qualify under the expanded OB3 rules.

QSBS benefits are realized when you sell your stock (as opposed to the company selling its assets) in a taxable transaction to a third party. Your QSBS gain and holding period generally carry over to stock received in a tax-free reorganization, but a special “gain freeze” rule applies if the stock received would not independently qualify as QSBS.

Yes, each shareholder can claim their own $10 million/$15 million exclusion (or 10 times basis) independently. For married couples filing jointly, they share the $10 million/$15 million limit; however, if filing separately, each spouse receives $5 million/$7.5 million. There is no company-wide limit on total QSBS benefits claimed by all shareholders.

Stock options themselves do not qualify, but the underlying stock received upon exercise can qualify for QSBS treatment. Your holding period starts when you exercise the options and actually receive the stock, not when the options were granted. Make sure the company meets all QSBS requirements at the time of exercise.

Once your company’s aggregate gross assets exceed the $50 million/$75 million limit, any new stock issued will not qualify for QSBS treatment, but stock issued before reaching the threshold remains eligible.

Stock issued before July 5, 2025, can qualify for QSBS treatment under the “old” rules. Stock issued on or after July 5, 2025, can qualify for QSBS treatment under the “new” OB3 rules. Your total lifetime QSBS exclusion is capped at $15 million across all qualifying stock sales, including both old and new stock. In other words, you cannot stack the new $15 million limit on top of the old $10 million limit.

Have questions about your company’s QSBS eligibility or how recent changes may impact your tax strategy? Withum’s team of experts can help determine if you qualify for the QSBS tax exclusions that are available.