Retirement Literacy Foundation · Seller Tax Education

QSBS: The Section 1202 Exclusion for Selling a C Corporation

By Hans Goldstein, founder, Retirement Literacy Foundation · Updated October 8, 2026

Short answer: Qualified small business stock (QSBS) is stock in a domestic C corporation acquired at original issue. If you hold it long enough, section 1202 can exclude a large part or all of the gain from federal tax. For stock issued after July 4, 2025, the exclusion is 50% after 3 years, 75% after 4 and 100% after 5, with a per-company cap of the greater of $15 million or 10 times basis. Stock issued earlier generally needs 5 years for a 100% exclusion, capped at $10 million or 10 times basis.

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The main requirements

C corporation (not an S corporation or LLC taxed as a partnership) when the stock is issued and during substantially all of your holding period.
Original issue: you acquired the stock from the company for money, property or services, not from another shareholder.
Gross assets at or below the limit when issued: $50 million for earlier stock, $75 million for stock issued after July 4, 2025.
Active business: at least 80% of assets used in a qualified business. Many service fields are excluded, including health, law, accounting, consulting, financial services, and businesses whose main asset is the skill or reputation of employees, as well as farming, hotels and restaurants.

Selling, and what if you are short of the holding period

A sale of the company's stock can qualify; a sale of its assets generally does not give shareholders the exclusion, which makes the stock vs asset sale choice critical. See selling a business: the taxes.
Section 1045 rollover: if you have held QSBS more than 6 months, you can defer gain by buying new QSBS within 60 days.
Gain that is not excluded is taxed at a 28% maximum rate for the taxable portion, plus possibly the 3.8% NIIT.

States

Not every state follows section 1202. California does not, so a California resident pays full state tax on the gain even when it is federally excluded. See the RLF study of state tax on a $1 million gain.

Common questions

How much gain can QSBS exclude?

Per company, the greater of $10 million (stock issued before July 5, 2025) or $15 million (stock issued after July 4, 2025), or 10 times your basis in the stock.

Does an S corporation qualify for QSBS?

No. The company must be a C corporation when the stock is issued and during substantially all of the holding period.

Does California allow the QSBS exclusion?

No. California taxes the gain even if it is excluded federally.

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Education only; nothing is sold here. The Retirement Literacy Foundation is a 501(c)(3) nonprofit. Tax rules depend on your facts; check with a CPA or tax attorney before you sell.