Does QSBS apply when I sell my company, and how much tax can it save me?

Qualified small business stock, or QSBS, is the tax break that can take millions off a founder's federal bill when the company sells. It only works if the stock qualifies and the deal keeps it. Most founders find out about it after the LOI is signed, when it is too late to fix.

What QSBS is

Section 1202 of the tax code lets a shareholder exclude part or all of the gain on stock in a qualifying company. The stock has to come from a domestic C corporation, you generally have to have received it directly from the company, and the business has to be an active one outside the excluded fields, which include most professional services, finance, farming and hospitality. The company's gross assets also have to be under a cap when the stock was issued.

Two sets of rules, depending on when the stock was issued

The One Big Beautiful Bill Act changed the rules for stock issued after July 4, 2025. Shares issued on or before that date keep the old rules for life. If you hold both kinds, each block is tracked separately.

Stock issued on or before July 4, 2025: gross assets up to $50 million at issuance, nothing excluded until you have held it more than five years, then 100 percent of the gain up to the greater of $10 million or 10 times your basis.

Stock issued after July 4, 2025: gross assets up to $75 million, 50 percent excluded at three years, 75 percent at four, 100 percent at five, up to the greater of $15 million or 10 times your basis. The limits are indexed for inflation starting in 2027.

Here is the part that gets missed. Stock issued after July 4, 2025 cannot reach even the three year mark until July 2028. If you are selling in the next year or two, the rules that apply to you are most likely the old ones. The new tiers matter for new rounds and new hires, not for most founders with a deal on the table today.

When the new tiers do apply, the gain that is not excluded at the three and four year marks is taxed at up to 28 percent, plus the 3.8 percent net investment income tax. Waiting for the five year mark is usually worth far more than the tier percentages suggest.

What it can be worth

A hypothetical, federal tax only. A founder was issued qualifying stock in 2019 with a basis of $50,000. The company sells for $20 million, so the gain is about $19.95 million. The cap is the greater of $10 million or 10 times basis, which is $500,000, so the cap is $10 million. That $10 million is excluded. The other $9.95 million is taxed at the top federal rate of 23.8 percent, about $2.37 million. With no QSBS, the whole gain is taxed at 23.8 percent, about $4.75 million. The difference is about $2.38 million. State tax, AMT and your own facts will change the answer.

Why the deal structure decides it

QSBS applies when you sell stock. In an asset sale the company is the seller, so the company pays tax on the gain first, and what reaches you is a distribution after that. Buyers often ask for an asset deal because they get a tax step up. Treat that as a price conversation, not a formality. If a buyer wants assets, ask what they will pay to make up the difference.

Put the structure in the LOI. A stock sale that keeps the exclusion is much easier to agree before exclusivity starts than after.

Other things to check

California does not follow the federal exclusion, so a California taxpayer owes state tax on the full gain. Each taxpayer has their own cap, so how shares are held matters. If you are close to a holding period mark and a sale is possible, ask your advisor whether a delay changes the math, and whether a rollover into new QSBS within 60 days fits your situation.

Questions for your tax advisor

Was my stock issued before or after July 4, 2025, and did the company qualify on the issue date? Does the deal as proposed stay a stock sale? How much tax is at stake in each structure? What does waiting six or twelve months change?

This is general information, not tax advice.

Related reading: How do I prepare my company for acquisition; What is a letter of intent (LOI) in M&A; What is a strategic buyer and how do I find one for my startup; startup taxes and QSBS basics.