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.