What is qualified small business stock?

The short answer, and what it depends on

QSBS is a tax incentive for people who invest in newly issued stock of small U.S. operating companies. The reward is large, because a gain that would otherwise be taxed at long-term capital gain rates can be partly or fully excluded from income. But the stock, the company and the investor all have to meet conditions, and the conditions are tested at specific dates. Publication 550 sets out the tests and the two tax benefits, a rollover and an exclusion. Because this is an area where Congress has changed the details more than once, note this page’s limits at the end.

The tests the stock must pass

Publication 550 says QSBS is stock that meets all of the following tests:

1. It is stock in a C corporation.
2. It was originally issued after August 10, 1993.
3. The corporation had total gross assets of $50 million or less at all times after August 9, 1993 and before it issued the stock, and immediately after the issuance. Assets of predecessors count, and a parent-subsidiary controlled group is treated as one corporation.
4. You acquired the stock at original issue, directly or through an underwriter, in exchange for money or other property (not stock) or as pay for services to the corporation. In some cases stock acquired from another QSBS holder, or by conversion, also qualifies.
5. The corporation met the active business test and was a C corporation during substantially all of your holding period.
6. Within the period beginning 2 years before and ending 2 years after issuance, the corporation did not buy more than a de minimis amount of its stock from you or a related party.
7. Within the period beginning 1 year before and ending 1 year after issuance, it did not buy more than a de minimis amount from anyone, unless the total value bought is 5% or less of all its stock.

The active business test

For any period of time, the corporation must have been an eligible corporation and must have used at least 80% of its assets, by value, in the active conduct of at least one qualified trade or business. An eligible corporation is any U.S. corporation other than a DISC or former DISC, a corporation with a section 936 election, a regulated investment company, a REIT, a REMIC, certain FASITs, or a cooperative. A qualified trade or business is any trade or business except: services in health, law, engineering, architecture, accounting, actuarial science, performing arts, consulting, athletics, financial services or brokerage services; a business whose principal asset is the reputation or skill of its employees; banking, insurance, financing, leasing, investing or similar businesses; farming; businesses with percentage-depletion products; and hotels, motels, restaurants and similar businesses.

Benefit 1: the section 1202 exclusion

If you hold QSBS for at least five years, you can exclude a percentage of the gain, set by when you acquired the stock. The publication gives 50% for stock acquired before February 17, 2009, 75% for stock acquired from February 17, 2009 to September 27, 2010, and 100% for stock acquired after September 27, 2010. The portion of the gain that is not excluded is a 28% rate gain: Table 4-4 says eligible gain minus the section 1202 exclusion is taxed at a maximum 28%. A separate 60% exclusion exists for certain empowerment zone business stock acquired before February 18, 2009.

There is also a per-issuer cap. The amount of gain eligible for the exclusion from the stock of any one issuer is limited to the greater of ten times your basis in all qualified stock of the issuer you sold or exchanged during the year, or $10 million ($5 million if married filing separately) minus the gain from the same issuer used in earlier years. Note that the publication labels this limit with the year 2022.

Example with the calculator: you sell QSBS acquired in 2014 and held 8 years for a $2 million gain on a $100,000 basis. The cap is the greater of $1 million (ten times basis) or $10 million, so $10 million; the whole gain is eligible; 100% is excluded; $2 million is excluded and nothing is taxed. If the gain were $15 million, the first $10 million would be excluded and $5 million would be other gain, taxed at the normal capital gain rate for the filer. If you held the stock for 4 years, nothing is excludable.

Benefit 2: the rollover

As an alternative, if you held QSBS for more than 6 months, you can postpone the gain by buying replacement QSBS within the 60-day period beginning on the date of sale. The replacement stock must be QSBS and must meet the active business requirement for at least the first 6 months after you buy it. You recognize gain only up to the amount realized minus the cost of replacement QSBS bought in that 60-day period. The postponed gain is subtracted from the replacement stock’s basis, and the holding period of the old stock tacks on to the new. You make the choice by the due date (with extensions) of the return for the year of sale.

How to report

Report the sale on Form 8949. For the exclusion, use Part II with the right box checked, enter “Q” in column (f) and the excluded gain as a negative number in column (g). For the rollover, enter “R” in column (f) and the postponed gain as a negative number in column (g). If a mutual fund or REIT passes through section 1202 gain, Form 2439 box 1c reports it.

Limits of this page

Publication 550 describes the law as it stood when written, and its own cap paragraph is labeled 2022. Section 1202 has been amended before and may be again, so for recently issued stock read section 1202 and the current Form 8949 and Schedule D instructions rather than relying on this summary. The calculator uses the publication’s percentages and cap only and ignores other limits and the alternative minimum tax. To estimate tax on the non-excluded part, see the capital gains tax calculator, the qualified dividends and capital gain worksheet calculator, and for the 3.8% surtax the NIIT calculator.

Sources

• IRS Publication 550, Investment Income and Expenses (2025): Gains on Qualified Small Business Stock, Rollover of Gain and Section 1202 Exclusion in chapter 4; Gain on qualified small business stock under Capital Gain Tax Rates and Table 4-4. Page last reviewed or updated by the IRS April 30, 2026. Read November 2, 2026.

Edition read: Publication 550 (2025), for use in preparing 2025 returns. Dollar limits and thresholds quoted on this page are for 2025 and can change; check the current publication and form instructions for your tax year. This page summarizes the publication and does not replace it. Marked for human review.