QSBS: The Section 1202 Exclusion for Selling a C Corporation
By Hans Goldstein, EA, founder, Retirement Literacy Foundation · Updated
Admitted to practice before the IRS.
The main requirements
- C corporation (not an S corporation or LLC taxed as a partnership) when the stock is issued and during substantially all of your holding period.
- Original issue: you acquired the stock from the company for money, property or services, not from another shareholder.
- Gross assets at or below the limit when issued: $50 million for earlier stock, $75 million for stock issued after July 4, 2025.
- Active business: at least 80% of assets used in a qualified business. Many service fields are excluded, including health, law, accounting, consulting, financial services, and businesses whose main asset is the skill or reputation of employees, as well as farming, hotels and restaurants.
Selling, and what if you are short of the holding period
- A sale of the company's stock can qualify; a sale of its assets generally does not give shareholders the exclusion, which makes the stock vs asset sale choice critical. See selling a business: the taxes.
- Section 1045 rollover: if you have held QSBS more than 6 months, you can defer gain by buying new QSBS within 60 days.
- Gain that is not excluded is taxed at a 28% maximum rate for the taxable portion, plus possibly the 3.8% NIIT.
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States
Not every state follows section 1202. California does not, so a California resident pays full state tax on the gain even when it is federally excluded. See the RLF study of state tax on a $1 million gain.
Common questions
How much gain can QSBS exclude?
Per company, the greater of $10 million (stock issued before July 5, 2025) or $15 million (stock issued after July 4, 2025), or 10 times your basis in the stock.
Does an S corporation qualify for QSBS?
No. The company must be a C corporation when the stock is issued and during substantially all of the holding period.
Does California allow the QSBS exclusion?
No. California taxes the gain even if it is excluded federally.
Related
- Selling a business: the taxes
- Capital gains on a business sale
- State tax on a $1 million gain
- Free Big Sale Tax Worksheet
- Free Big Sale Tax Worksheet
More for sellers: Suspended Passive Losses When You Sell a Rental Property · Capital Loss Carryover · Real Estate Professional Status Explained · Unrecaptured Section 1250 Gain Explained · Converting a Rental to a Primary Residence, or a Home to a Rental
Sources: IRC section 1202, as amended by Pub. L. 119-21 (July 4, 2025); IRS Topic 409 for the 28% rate on the taxable part. Checked October 10, 2026.
Education only; nothing is sold here. The Retirement Literacy Foundation is a 501(c)(3) nonprofit. Tax rules depend on your facts; check with a CPA or tax attorney before you sell.
Want to run these numbers for your own situation?
The Retirement Literacy Foundation runs free retirement classes on Social Security timing, taxes in retirement, and how to turn savings into income. No products are sold at our classes.
Hans Goldstein, EA
Founder & Executive Director · Retirement Literacy Foundation, a 501(c)(3) non-profit
Admitted to practice before the IRS
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