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IRC §1202 QSBS exclusion

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Quick Answer

Section 1202 allows a non-corporate taxpayer to exclude gain on qualified small business stock that meets its issuance, issuer and holding-period conditions.1,2

What it is

The stock must be acquired at original issue from a domestic C corporation that met a gross-assets ceiling at issuance, the issuer must satisfy an active-business test that excludes many service businesses, and the holder must meet the applicable holding period. The exclusion percentage and required holding period depend on when the stock was acquired.1,2

Operational context

What good looks like

Why It Matters

The exclusion turns on facts fixed at issuance — the issuer's form, the gross-assets ceiling, acquisition at original issue — so it is generally won or lost before an investment is made rather than at sale.1

Common mistakes

Term Family

Related concepts

QSBS AMT and NIIT interaction

Frequently Asked Questions

What is IRC §1202 QSBS exclusion in venture capital?

The stock must be acquired at original issue from a domestic C corporation that met a gross-assets ceiling at issuance, the issuer must satisfy an active-business test that excludes many service businesses, and the holder must meet the applicable holding period.

Why is IRC §1202 QSBS exclusion important for startups?

Understanding IRC §1202 QSBS exclusion is critical for founders navigating the fundraising process. It directly impacts deal terms, valuation, and the relationship between founders and investors.

Sources & References

  1. 1.irc-1202 — 26 U.S.C. §1202 — Partial exclusion for gain from certain small business stock (**as amended by P.L. 119-21 §70431**)26 U.S.C. §1202 — Partial exclusion for gain from certain small business stock (**as amended by P.L. 119-21 §70431**)Office of the Law Revision Counsel(Section 1202 allows a non-corporate taxpayer to exclude gain on qualified small business stock that meets its issuance, issuer and holding-period conditions.)primary · T1 · carry-tax · term
  2. 2.irc-1202-lii — 26 U.S.C. §1202 (mirror)26 U.S.C. §1202 (mirror)Cornell LII(Section 1202 allows a non-corporate taxpayer to exclude gain on qualified small business stock that meets its issuance, issuer and holding-period conditions.)primary · T1 · carry-tax · term
  3. 3.wilmerhale-qsbs — Section 1202: Qualified Small Business Stock (Apr. 15, 2025) — **pre-OBBBA; its $10M/$50M/5-year figures state LEGACY law**Section 1202: Qualified Small Business Stock (Apr. 15, 2025) — **pre-OBBBA; its $10M/$50M/5-year figures state LEGACY law**WilmerHale(Section 1202 allows a non-corporate taxpayer to exclude gain on qualified small business stock that meets its issuance, issuer and holding-period conditions.)primary · T1 · carry-tax · term

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