QSBS (Qualified Small Business Stock)
IRC § 1202 stock granting up to 100% capital-gains exclusion on sale after 5 years.
Definition
QSBS under IRC § 1202 allows non-corporate shareholders to exclude up to 100% of capital gains on qualifying stock sold after a 5-year holding period. Exclusion capped at greater of $10M or 10x basis. Requires C-corporation issuer with gross assets under $50M at issuance.
Context
Major tax benefit for C-corp founders and early investors. LLC owners do not get QSBS unless converted to C-corp.
Example
A founder converts LLC to Delaware C-corp at $5M valuation. After 5 plus years, founder sells stock at $20M. QSBS allows excluding up to $10M (or 10x basis equals $50M, so full $20M gain). Federal tax savings: about $4-5M.
Common pitfalls
- 5-year holding clock starts at C-corp stock issuance, not LLC formation.
- Conversion timing affects QSBS eligibility.
- Engage tax adviser before conversion or sale.