What is Qualified Small Business Stock?

In the early 1990s, members of Congress recognized a resource gap for small and early-stage businesses – particularly those in the increasingly critical technology and internet space. To help close that gap and generate momentum for entrepreneurs, they created a tax exemption that applied to the sale of shares of qualified small businesses.

In 1993 as part of the Omnibus Budget Reconciliation Act, Qualified Small Business Stock (QSBS) entered the IRS code, offering a 50% exemption on eligible federal gains designed to help businesses raise capital and investors (either private or employee) enjoy a tax benefit.

Here in 2026, on the heels of another omnibus – the One Big Beautiful Bill Act (OBBBA) – QSBS has gotten an update, with expanded eligibility and increased exemption limits.

“This is something we often see utilized to give founding partners and original employees some incentive, since there might not be the capital for large salaries,” says Bonnie Harper, who leads the Private Wealth Consulting team at Raymond James.

“The hope is the stock will exponentially grow in value, and shareholders will enjoy this substantial benefit when they decide to sell. Our conversations are often about structuring new businesses from the outset to take advantage of the opportunity.”

While this primer serves as a helpful introduction, keep in mind that QSBS requirements, like most other IRS rules, are complex and nuanced. The best way to ensure you’re making the most strategic moves for your own business or personal circumstances is to sit down with your tax professionals.

What are the potential benefits for holders of Qualified Small Business Stock?

A 100% exemption on federal gains of up to $15 million

The primary benefit of QSBS is the ability to sell up to $15 million in company shares (or 10 times basis, whichever is greater) and exclude 100% of the gains from federal taxes. The current $15 million cap was established by OBBBA and applies to shares issued after July 4, 2025. For shares issued before July 5, 2025, the benefit remains at the previous level – $10 million or 10 times basis.

For example, under the new rules, an investor who purchases $15 million of eligible company shares could avoid paying federal capital gains tax on up to $150 million.

The deferral of gains from a sale

Shareholders also have the option to roll over gains from the sale of one QSB stock to another QSB investment, if the initial stock has been held for at least six months. In some cases, the deferral could help them realize the full exemption amount if they hadn’t yet held their shares for the required five years.

What makes a company a Qualified Small Business?

Gross assets of $50 million or less

Historically, for shares to qualify for the exemption they must have been issued and acquired when the company’s assets were no more than $50 million. That asset cap was raised to $75 million in 2025 by the OBBBA for shares issued after July 4, 2025.

Active status

A business must currently be operating for its stock to qualify. Roughly translated “operating” means 80% of a company’s assets are directed toward the conduct of its trade or industry.

C-corp registration

Qualified businesses must be registered as C-corporations versus an S-corp or LLC. Businesses do have the option to convert to C-corps, but only newly issued, post-conversion shares would qualify as QSBS, while existing shares would not be QSBS.

Operation in an approved industry

Some approved industries include software and technology, manufacturing, automation, energy, consumer goods, and logistics – typically those not directly providing a professional service. However, knowing if a business qualifies tends to be a matter of knowing which business types don’t. Non-qualified businesses include:

Those providing services in the fields of health, law, engineering, architecture, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services or any trade or business where the principal asset of such trade or business is the reputation or skill of one or more of its employees
Banking, insurance, financing, leasing investing or similar
Farming business (including the business of raising or harvesting trees)
Those involving the production or extraction of natural resources

What rules apply to the QSBS benefits?

Recipients must be noncorporate US taxpayers.

All noncorporate shareholders qualify to receive the exemption when selling QSBS, which includes individual investors, trusts, estates and pass-through entities.

Shares must be held for at least five years.

To qualify for the 100% exemption, shares must be held for five years. However, under the OBBBA the benefit is phased in, allowing shareholders to receive partial benefits if they sell before the full five years – 50% at the three-year mark and 75% at four.

Shares must have been acquired at original issuance.

Benefits only apply to stock acquired at original issuance, whether via direct purchase or grants of stock options or restricted shares, meaning shares sold to another investor or purchased on a secondary market do not qualify for exemption. The benefit can be retained, however, if the shares are gifted, inherited or obtained through divorce.

Supplemental sources: IRS.gov, TaxFoundation.org