What are the QSBS requirements? Definition, how they work and examples
The tests a share has to pass for the Section 1202 exclusion — at the company, at issuance and while you hold it — and the checklist to run before you rely on it.
The short answer
The QSBS requirements are the Section 1202 tests a share must pass before its gain can be excluded from US federal tax: a domestic C corporation, gross assets of no more than $75 million when the share is issued, a share acquired directly from the company, an active qualifying business, and a minimum holding period. Most of the tests are about the company, not about you, and several are fixed on the issuance date. A founder, an employee and a later investor in the same startup can therefore hold shares of one class with three different answers.
What are the QSBS rules? The checklist
Every test below must be met; there is no partial credit. Run them in this order — the first three are fixed on the day the shares are issued, the last four run for as long as you hold them. What the exclusion is worth once they pass is explained on what is QSBS. Domestic C corporation The issuer is a US corporation taxed under subchapter C. LLC units and S corporation shares do not qualify; a company that converts to a C corporation can issue qualifying stock from then on.
QSBS stock requirements: what the company has to be
Aggregate gross assets are the company’s cash plus the tax basis of everything else it owns. They are not its valuation. A software company valued at $500 million can still pass if it holds little cash and its assets have a low basis; a company that has just banked an $80 million round fails on that day. Property contributed to the company counts at its fair market value when contributed. The active-business test excludes whole sectors.
Do stock options qualify for QSBS?
The option does not; the stock you get on exercise can. An option is a contract, not stock, so the tests are applied on the day the company issues the shares to you. That date fixes three things at once: whether the company is still under the asset ceiling, whether old or new Section 1202 rules apply, and when the holding period starts. How to exercise stock options covers the mechanics. Shares from settled RSUs follow the same logic: they are acquired as pay for services when they are delivered, which is when the tests and the clock start.
How to qualify for QSBS, and how to apply for it
There is no application to file. You qualify by meeting the tests and claim the exclusion on your return for the year of the sale — on Form 8949, code Q, with the excluded gain entered as a negative adjustment. The burden of proof sits with you. Each risk below has a document that answers it. Company was not a C corporation Keep the certificate of incorporation and any conversion documents with the share certificate. Assets over the ceiling on issuance Ask for a written gross-asset statement dated to the issuance — or the exercise — date.
Three holders of the same company: a worked example
One Delaware C corporation builds software. It had $8 million of gross assets in 2023, $60 million after a round in March 2025, and $140 million after a round in June 2026. Three people hold its common stock. The investor’s position is the common case in pre-IPO shares: whether bought directly or through an SPV, a secondary purchase is not original issue. The employee’s is the one timing could have changed — the exercise date, not the grant, decided the asset test.
QSBS requirements in 2026: the numbers
Common mistakes with the QSBS exemption rules
Treating valuation as gross assets The test uses cash and tax basis, not the price of the last round. Read the balance sheet, not the headline. Exercising after a big round The asset test is run on the exercise date. A round that lands the cash first can close the door for every later exercise. Missing the 83(b) deadline Thirty days from the transfer, with no extension. A late election leaves the acquisition date at vesting. Selling back to the company A buy-back from you or a related person near the issuance date can disqualify shares that otherwise pass every test.
The terms this page uses
QSBS Qualified small business stock: shares that pass every Section 1202 test, whose gain can be partly or fully excluded from federal tax. Aggregate gross assets Cash plus the adjusted tax basis of the company’s other property, with contributed property at fair market value. Tested before and immediately after each issuance. Original issue Acquiring shares from the company, not from another holder — the test every secondary purchase fails. Qualified trade or business Any business outside the excluded fields — professional services, finance, farming, extraction, hospitality and similar.
Questions about QSBS requirements
What are the QSBS requirements for 2026? For stock acquired after 4 July 2025: a domestic C corporation with no more than $75 million of gross assets when the stock is issued, original issue, an active qualifying business, no disqualifying redemptions and at least three years of holding. Earlier stock follows the old $50 million and more-than-five-years tests. Do I have to apply for QSBS? No. There is no application or advance ruling. You claim the exclusion on your return in the year of the sale and keep the evidence that each test was met. Does stock bought in a secondary sale qualify? No.
What are the QSBS requirements for 2026?
For stock acquired after 4 July 2025: a domestic C corporation with no more than $75 million of gross assets when the stock is issued, original issue, an active qualifying business, no disqualifying redemptions and at least three years of holding. Earlier stock follows the old $50 million and more-than-five-years tests.
Do I have to apply for QSBS?
No. There is no application or advance ruling. You claim the exclusion on your return in the year of the sale and keep the evidence that each test was met.
Does stock bought in a secondary sale qualify?
No. Section 1202 requires the stock to be acquired at original issue from the company. A purchase from an employee or an earlier investor fails that test, directly or through a vehicle.
When does the QSBS clock start for option shares?
On the exercise date, when the shares are issued. The grant date does not count. For unvested shares, the date the shares vest, unless an 83(b) election moves it back to the transfer.
Can an LLC issue QSBS?
Not while it is taxed as a partnership. Once it converts to a C corporation, stock issued from then on can qualify; the gross-asset test counts contributed property at fair market value at conversion.
Where every rule on this page comes from
Every test and threshold was checked against the US Code and the IRS on 1 October 2026 and reflects federal law as amended on 4 July 2025. The three holders are an illustration, not a client case. State rules are not covered.