October 21, 2026 · 5 min read
What Is the QSBS Gross Asset Test? Definition and Examples
How big a company can be when it issues stock that qualifies for the QSBS tax break, what is counted and why the issue date matters.
- Taxes
The QSBS asset test caps how much a company may own when it issues stock that can qualify for the Section 1202 tax break. Its gross assets, meaning cash plus the tax basis of everything else, must not exceed $75 million before and right after the issue. For stock issued on or before July 4, 2025, the cap was $50 million.
If you are a founder, an employee or an early investor, the test is run on the day your shares are issued. Shares issued under the cap keep their status as the company grows. Once the company crosses the cap, no stock it issues later can qualify, even if it shrinks again.
$75M
Gross-asset cap for stock issued after July 4, 2025, tested before and right after the issue
$50M
Cap for stock issued on or before July 4, 2025
>50%
Ownership link at which a parent and its subsidiaries are tested as one company
$10,000
Step to which the $75M cap is rounded when it is indexed for inflation after 2026
General Information, Not Tax Advice
This page describes US federal rules as of October 2026. The test turns on the company’s tax records on specific dates. Have a qualified tax adviser review your facts before you rely on it.
What Is the QSBS Gross Asset Test?
Qualified small business stock (QSBS) is stock whose gain can be partly or fully excluded from federal income tax. One of the tests is about size. Under Section 1202(d), the company must be a “qualified small business” when it issues the stock. That means a US C corporation, which pays its own income tax, whose aggregate gross assets stay within the cap.
The test is run at two moments. First, the company’s gross assets must not have exceeded the cap at any time before the issue. Second, they must not exceed it immediately after the issue, counting the money the company has just received. A company that is under the cap before a round can fail the test because of that same round.
The test looks at the company only on issue dates. After that, the company can grow as large as it likes, and your earlier shares keep their status. The other tests, such as the active-business test and the holding period, are covered in QSBS requirements.
QSBS Asset Limit: $50 Million or $75 Million?
The issue date decides which limit applies. The One Big Beautiful Bill Act, enacted on July 4, 2025, raised the limit from $50 million to $75 million. The change applies to stock issued after that date. Stock issued on or before it is still judged against $50 million.
The new limit also moves with inflation. For taxable years beginning after 2026, the $75 million figure is adjusted each year for the cost of living and rounded to the nearest $10,000. The adjusted figure for 2027 had not been published when this page was checked.
One effect follows from the wording of the statute. The new test asks whether gross assets ever exceeded $75 million before the issue. So a company that passed $50 million before July 2025, but never $75 million, can issue qualifying stock again. Its older stock issued above $50 million stays outside QSBS. Confirm this point with an adviser before you rely on it.
How Gross Assets Are Counted
Gross assets are cash plus the adjusted tax basis of all other property. Tax basis is, roughly, what the company paid for an asset, less depreciation. Debts are not subtracted, so money from a loan counts in full. The company’s valuation plays no part. A software company valued at $500 million can pass if its cash and the basis of its assets are small.
- CashAll of it counts, including money just raised in the round being tested.
- Property the company boughtEquipment, real estate and purchased software count at their adjusted basis, which can differ from their market value.
- Property contributed for stockCounts at its fair market value on the day it was contributed. This matters when an LLC converts to a corporation and moves its business into it.
- SubsidiariesA parent and the companies it owns more than 50% of are tested as one company. Their assets are added together.
The asset test reads the balance sheet on the issue date. Cash and tax basis count, valuation does not, and the first time the cap is crossed closes the door for every later issue.
A Worked Example: Four Issues, One Company
A Delaware C corporation builds software. Its founder buys common stock at formation in 2023. A seed round in 2024 leaves it with $12 million of gross assets. A Series A in October 2025 brings the total to $70 million. A Series B in August 2026 lifts it to $160 million. An employee exercises options in September 2026.
Illustrative company and figures. Passing the asset test is only one of the QSBS tests. The employee would still fail if the company later spent its cash and fell back to $60 million
Computed on 26 USC 1202(d) as amended by Pub. L. 119-21 · rules as of October 2026
The Series B investor fails on the day of their own round, because the test counts the money just raised. The employee fails for a different reason. The company had already crossed $75 million once, so no later issue can pass. Had the employee exercised before the Series B, the shares could have passed.
QSBS Asset Test Rules as of October 2026
The gross asset test under Section 1202, by issue date
As of October 2026 · 26 USC 1202 (Cornell LII) · IRS Instructions for Schedule D (2025)
Common Mistakes with the QSBS Asset Test
- Using valuation instead of the balance sheetThe last round’s price does not enter the test. Cash and tax basis do.
- Forgetting the money from the round itselfThe test runs immediately after the issue. A round that pushes cash above the cap fails for its own shares.
- Assuming the company can requalify by spendingOnce gross assets exceed the cap, every later issue fails. Spending the cash does not reset the test.
- Reading the grant date for optionsOption shares are issued on exercise. The test is run on that date, and the grant date plays no part.
- Ignoring subsidiariesAssets of companies the parent owns more than 50% of are added in.
The Terms This Page Uses
- QSBS
- Qualified small business stock: shares that pass every Section 1202 test. Their gain can be partly or fully excluded from federal tax.
- Aggregate gross assets
- The company’s cash plus the adjusted tax basis of its other property, with contributed property at fair market value.
- Adjusted basis
- Roughly what the company paid for an asset, after adjustments such as depreciation.
- Qualified small business
- A US C corporation whose gross assets stayed within the cap before and right after it issued the stock.
- C corporation
- A US company taxed under subchapter C of the tax code. It pays its own income tax.
- Parent-subsidiary controlled group
- A parent and the companies it owns more than 50% of. Section 1202 tests them as one company.
Questions About the QSBS Asset Test
Where Every Rule on This Page Comes From
Every rule was last checked on October 21, 2026, against the US Code and the IRS. Rules are US federal and reflect the law as amended on July 4, 2025. The example company is illustrative. State tax is not covered.
- 01US Code (Cornell LII)Current law26 USC 1202(d) — $75M cap, when it is tested, cash plus adjusted basis, contributed property, controlled groups, reports; (b) indexing after 2026, rounded to $10,000; (i) contributed property
- 02US Code (Cornell LII)07.04.2025Effective-date note, Pub. L. 119-21 §70431(c)(3) — the $75M cap applies to stock issued after July 4, 2025
- 03Internal Revenue Service2025Instructions for Schedule D (Form 1040) — QSB stock: $75M, or $50M if issued on or before July 4, 2025, before and immediately after issuance
This page explains how a market works. It is not investment advice, not a recommendation of any security, strategy or company, and not an offer to sell or a solicitation to buy anything. Private companies may never list or be acquired, positions in them can be illiquid for years, and the entire amount invested can be lost. Figures are accurate as of the dates shown and change. Requirements for investor status, and the tax treatment of a private holding, differ by jurisdiction — the jurisdiction is named wherever this page discusses either. Prepared by the AXEVIL Capital research team. Tax rules described here are United States federal rules unless another jurisdiction is named; they change every year and depend on your own facts. Nothing here is tax advice — take your documents to a qualified adviser.
What closed on the private market in the past two weeks
The rounds that priced, the tender offers that opened and the listings that filed — with the structure of each deal and the date on every figure. Written by the team that reads the paperwork.
Where to go from here
TaxesWhat Is Qualified Small Business Stock (QSBS)? Definition and ExamplesWhat is QSBS? Qualified small business stock can take the federal tax off part or all of a startup gain. Which shares qualify and how much gain is excluded.
TaxesWhat Are the QSBS Requirements? Definition, How They Work and ExamplesQSBS requirements are the tests a share must pass for the Section 1202 tax break: the company, its size, how you got the shares and how long you hold them.
TaxesWhat Is a QSBS Attestation Letter? How It Works and ExamplesA QSBS attestation letter is a company’s signed statement that its stock met the Section 1202 tests. What it covers, who signs it and how holders use it.