TEXAS BUSINESS LAW
Qualified Small Business Stock (QSBS): 2026 Guide
Qualified small business stock (QSBS) is stock in a small U.S. C corporation that, if you hold it long enough, can let you exclude much or all of your capital gain from federal tax when you sell. The benefit comes from Section 1202 of the Internal Revenue Code, and it is one of the most valuable incentives available to founders and early investors. The rules changed significantly in July 2025, so the answer now depends partly on when you acquired the stock.
Note (June 2026): QSBS is a technical, fast-changing area of federal tax law, and the dollar thresholds below are now inflation-indexed and were overhauled by 2025 legislation. The figures here are accurate to current law as we understand it, but QSBS treatment is fact-specific and the stakes are high. Confirm any position with a qualified tax professional before relying on it.
What QSBS Is
QSBS is stock that meets a set of requirements under Section 1202. When those requirements are met and the holding period is satisfied, a non-corporate shareholder can exclude a percentage of the gain on sale from federal income tax. The policy goal is to channel investment into small, active businesses by rewarding people who fund them early and hold for the long term.
Two things make QSBS distinctive. First, the benefit can be enormous — for qualifying stock, a large share of the gain can escape federal tax entirely. Second, it is unforgiving: miss one requirement (wrong entity type, too many assets, the wrong kind of business, too short a hold) and the exclusion can be lost.
The Rules Changed in July 2025
The One Big Beautiful Bill Act, signed July 4, 2025, expanded QSBS for stock acquired after that date, while leaving the older rules in place for stock acquired on or before it. The result is two regimes running side by side.
| Feature | Stock acquired on or before July 4, 2025 | Stock acquired after July 4, 2025 |
|---|---|---|
| Holding period for full benefit | 5 years for 100% exclusion (stock acquired after 9/27/2010) | Tiered: 50% at 3 years, 75% at 4 years, 100% at 5 years |
| Per-issuer gain cap | Greater of $10 million or 10× basis | Greater of $15 million or 10× basis (indexed for inflation after 2026) |
| Company size limit (gross assets) | $50 million or less | $75 million or less (inflation-indexed) |
For stock you already held before mid-2025, the familiar “hold five years for up to 100%” framework still applies. For stock issued after July 4, 2025, you can get a partial exclusion sooner (at three and four years) and the company can be larger and the per-issuer cap higher. The dollar figures are now adjusted for inflation, so they will drift upward over time.
Who and What Can Qualify
The exclusion is generous, so the gatekeeping requirements are strict. In general, all of the following must be true:
- C corporation. The issuer must be a domestic C corporation. LLCs, partnerships, and S corporations do not issue QSBS (though an entity conversion before issuance can sometimes set it up). This is why the choice you make when forming a corporation in Texas can matter for QSBS years later.
- Original issuance. You must acquire the stock at original issue — directly from the company — in exchange for money or property, or as compensation for services. Buying shares from another stockholder generally does not qualify.
- Size test. The corporation’s aggregate gross assets must stay at or below the size limit ($50M under the old rules, $75M under the new) before and immediately after the stock is issued.
- Active business. At least 80% of the company’s assets must be used in the active conduct of a qualified trade or business.
- Eligible industry. Certain fields are excluded — notably most professional and personal-services businesses (health, law, engineering, architecture, accounting, actuarial science, consulting, financial services, brokerage, and similar), plus banking, insurance, farming, extractive industries, and hospitality. Technology, manufacturing, retail, and many product businesses typically qualify.
- Holding period. You must hold long enough to reach the applicable exclusion tier (see the table above).
Because each requirement is a potential trip-wire, QSBS status is usually something to plan for at formation and monitor over time, not something to assess for the first time at sale.
How the Exclusion Works When You Sell
If your stock qualifies and you have met the holding period, you exclude the applicable percentage of your gain — up to the per-issuer cap (the greater of the dollar limit or 10× your basis in the stock). Gain above the cap is taxed under the normal capital-gains rules.
A point the old version of this article muddled is worth getting right: the often-cited 28% maximum rate applies only to the taxable portion of gain on partial-exclusion stock (the 50%- and 75%-tier vintages), and for those older shares a portion of the excluded gain can be an alternative minimum tax preference item. For stock that qualifies for the 100% exclusion, none of the excluded gain is taxed and there is no AMT preference on it. So the practical rate ranges from “nothing” (full exclusion) to a 28% cap on the still-taxable slice of partial-exclusion stock.
Deferring Gain With a Section 1045 Rollover
If you sell QSBS before hitting the holding period, you are not necessarily out of luck. Section 1045 lets you roll the proceeds into new QSBS within 60 days of the sale and defer the gain, carrying your original holding period into the replacement stock. This is a useful tool when a qualifying company is acquired before you reach five (or three or four) years, but the 60-day window is tight and the mechanics are technical.
Why This Belongs in Your Formation Plan
QSBS rewards decisions made years before a sale: choosing a C corporation, issuing stock at original issue, staying inside the size and industry limits, and tracking holding periods. Founders weighing how to capitalize the company — see founder stock: pay cash or contribute IP — should fold QSBS eligibility into that conversation rather than discovering at exit that a structural choice cost them the benefit. Given the 2025 changes and the inflation-indexing, this is an area to revisit with a tax adviser as your company grows.
Frequently Asked Questions
Does my LLC’s stock qualify for QSBS? No. QSBS must be issued by a C corporation. An LLC or S corporation can sometimes convert to a C corporation before issuing stock, but the QSBS clock and tests generally start at that qualifying issuance.
How long do I have to hold QSBS? For stock acquired after July 4, 2025, you can exclude 50% at three years, 75% at four, and 100% at five. For stock acquired earlier, the prior framework (generally five years for up to 100%) applies.
What kinds of businesses are excluded? Most professional and personal-services firms (law, health, accounting, consulting, financial services, and similar), plus banking, insurance, farming, extractive industries, and hospitality. Many technology, manufacturing, and product companies qualify.
What if my company is acquired before I hit the holding period? A Section 1045 rollover may let you reinvest the proceeds in new QSBS within 60 days and preserve your holding period. The rules are technical — get advice before the sale closes.
Building a Texas company with QSBS in mind? Reidel Law Firm helps founders structure entities and stock issuances with an eye toward long-term tax treatment, coordinating with your tax adviser — flat-fee where we can. Talk to a Texas business attorney →
