The most generous provision in the tax code, explained.

Section 1202 allows non-corporate taxpayers to exclude gain from the sale of Qualified Small Business Stock from federal income tax. For stock issued after July 4, 2025, the exclusion is capped per issuer at the greater of $15 million or 10 times the investor's adjusted basis in the stock. Stock issued on or before that date remains subject to the prior $10 million cap.

The 10x basis alternative is what makes the provision extraordinary for larger checks. An investor who puts $5 million into qualifying stock can potentially exclude up to $50 million of gain. Excluded gain is also exempt from the 3.8% net investment income tax.

State treatment varies. Some states conform to the federal exclusion, while others, notably California, do not. New York generally conforms. Confirm your state's treatment with your advisor.

Four tests matter most, and all of them must be satisfied.

First, the issuer must be a domestic C corporation. Stock in S corporations, LLCs taxed as partnerships, and foreign entities does not qualify. Second, the stock must be acquired at original issuance, directly from the company for money, property, or services, not purchased from another shareholder. Third, the company's aggregate gross assets must not exceed the statutory ceiling immediately before and after issuance: $75 million for stock issued after July 4, 2025, and $50 million for stock issued on or before that date. Fourth, the company must use at least 80% of its assets in a qualified active trade or business.

The qualified trade or business test excludes certain service businesses, including health, law, financial services, consulting, and hospitality, along with banking, farming, and extraction. Technology, manufacturing, Medtech device companies, and most product businesses qualify. Tech-enabled services companies sit in a gray zone that requires careful analysis.

The One Big Beautiful Bill Act made the largest expansion of QSBS since 2010, and every change applies only to stock issued after July 4, 2025. Stock issued on or before that date keeps the old rules, so investors holding both vintages now hold two distinct tax assets that must be tracked separately.

Three changes matter. The per-issuer exclusion cap rose from $10 million to $15 million, indexed for inflation after 2026. The gross asset ceiling rose from $50 million to $75 million, also indexed, which pulled a large band of later-stage companies into eligibility for the first time. And the old five-year cliff was replaced by a tiered exclusion schedule that rewards shorter holds.

The non-excluded portion of gain at the 50% and 75% tiers is taxed at a 28% federal rate plus the 3.8% net investment income tax, which produces the effective rates above. Stock issued on or before July 4, 2025 still requires the full five-year hold for any exclusion.

Section 1045 is the pressure-release valve. If you sell QSBS you have held for more than six months but have not yet reached the holding period you want, you can defer the gain by reinvesting the proceeds into new QSBS within 60 days of the sale. The holding period of the original stock tacks onto the replacement stock, so the clock keeps running toward your exclusion tier.

The mechanics are unforgiving. The 60-day window runs from the date of sale, not from when cash arrives. You must reinvest proceeds, not just gain, to defer the full amount. The election is made on your tax return for the year of sale. And the replacement stock must itself qualify as QSBS at issuance, which means finding a qualifying C corporation willing to close within your window.

That last requirement is exactly why this marketplace exists. Every deal tagged QSBS Rollover is an issuer that has structured its round for fast closings, typically with expedited subscription processing, so Section 1045 investors can deploy capital inside their 60 days.

Redemptions can poison qualification: significant stock buybacks by the issuer around the time of issuance can disqualify stock entirely. Holding through an LLC period does not count; the entity must be a C corporation when the stock is issued. Convertible notes and SAFEs generally start the QSBS clock only at conversion, not at investment. Gifting QSBS transfers the exclusion, and each donee may have their own per-issuer cap, but aggressive stacking strategies draw IRS scrutiny. Secondary purchases never qualify, no matter how small the company.

None of this is a reason to avoid QSBS. It is a reason to insist on issuer-level documentation, a qualification representation in the purchase agreement, gross asset certification at close, and ideally a tax opinion, and to run everything past your own counsel. Listings on QSBS Invest disclose what documentation each issuer provides.