What Is the Qualified Small Business Stock (QSBS) Exclusion?

The Qualified Small Business Stock (QSBS) exclusion, found in Section 1202 of the tax code, allows investors to exclude up to 100% of the capital gain from the sale of certain small business stock from federal income tax. To qualify, the stock must have been issued by a domestic C corporation with gross assets of $50 million or less at the time of issuance, and you must have held it for more than five years after acquiring it directly from the company. The exclusion can be enormous — up to $10 million in gain (or 10 times your cost basis, whichever is greater) per taxpayer per issuer — making it one of the largest tax breaks available to startup investors and founders. Unlike most capital gains, which already receive favorable long-term rates, qualifying QSBS gains can be completely federal-tax-free. Not all states conform to the federal exclusion, so you may still owe state taxes on the gain even if it's fully excluded at the federal level.