Qualified Small Business Stock (QSBS)
Stock that qualifies for the capital gains exclusion under Internal Revenue Code § 1202; substantially expanded by the One Big Beautiful Bill Act of 2025 to include tiered exclusions for shorter holding periods.
Qualified Small Business Stock (QSBS) is stock that meets the requirements of Internal Revenue Code § 1202, qualifying its holder for a capital gains exclusion at sale. To qualify, the stock must be (1) issued by a domestic C corporation, (2) issued to a non-corporate taxpayer, (3) acquired at original issuance, directly or through an underwriter, in exchange for money or property other than stock, or as compensation for services to the corporation, (4) issued by a corporation whose aggregate gross assets did not exceed the applicable threshold at any time before the issuance or immediately after it, and (5) issued by a corporation that meets the active business requirement during substantially all of the holder's holding period (at least 80% of assets, by value, used in the active conduct of a qualified trade or business, with specific service businesses excluded under § 1202(e)(3)).
Pre-OBBBA rules (stock issued through July 4, 2025)
Under the rules in effect before the One Big Beautiful Bill Act, QSBS held for more than five years qualified for a 100% federal capital gains exclusion (for stock acquired after September 27, 2010). The per-issuer gain cap was the greater of $10 million or 10 times adjusted basis. The aggregate gross assets ceiling was $50 million, tested at all times before the issuance and immediately after it.
Post-OBBBA rules (stock issued after July 4, 2025)
The One Big Beautiful Bill Act (P.L. 119-21), signed July 4, 2025, substantially expanded Section 1202 for QSBS issued after that date. The post-OBBBA regime introduced tiered exclusions (50% at 3 years, 75% at 4 years, 100% at 5+ years), raised the per-issuer gain cap from $10 million to $15 million (indexed for inflation from 2027), and raised the aggregate gross assets ceiling from $50 million to $75 million (also indexed). Pre-OBBBA QSBS continues to be governed by the original rules; stock received in exchange for pre-OBBBA stock generally keeps the original acquisition date when its holding period tacks, so a restructuring does not by itself move stock into the new regime (§ 1202(a)(6)(B)).
Texas conformity
Texas has no personal income tax, so a Texas-resident individual owes no state income tax on QSBS gain and the federal exclusion is the one that matters. Residents of states that do not follow § 1202 can owe state income tax on gain the federal exclusion covers.