Before you count on a tax-free exit, you need to verify that your stock actually qualifies. Section 1202 of the Internal Revenue Code offers up to $10M or $15M in tax-free capital gains (depending on when your stock was issued) — but only if every requirement is met. Miss one, and the exclusion disappears entirely.
Related: Once you've confirmed eligibility, the next step is documenting it — see what a QSBS attestation letter needs to say, section by section.
This checklist walks through every requirement, in order, so you can confirm QSBS eligibility before you sell — not after.
For the full analysis of each requirement, see the Complete Guide to QSBS & Section 1202.QSBS is binary: if you miss one requirement, you lose the exclusion.
Washington context (important): If stock qualifies under §1202, under the statute as enacted, it is generally exempt from Washington's 9.9% income tax and Washington's capital gains tax. Oregon, by contrast, no longer conforms to the federal §1202 exclusion — Oregon residents should assume their QSBS gain is fully taxable at the state level. The state-level stakes are large.
Quick eligibility summary (all required)
- Domestic C corporation (not LLC, partnership, S corp, or foreign corp)
- Original issuance (you acquired stock from the corporation)
- Gross assets ≤ $75M (post-OBBBA; $50M for stock issued on or before July 4, 2025) before and immediately after issuance
- 80% active business test (service-business risk)
- Holding period: 5 years for full exclusion (post-OBBBA: tiered 50%/75%/100% at 3/4/5 years for stock issued after July 4, 2025)
- No problematic redemptions
Download: Free QSBS Issue-Spotting Checklist
The checklist (what to confirm)
1) Is it a domestic C corporation?
QSBS does not apply to LLCs, partnerships, S corps, or foreign corporations.
Note: Delaware Public Benefit Corporations are still C corporations for federal tax purposes. Converting an existing C-corp to a PBC via a §242 charter amendment does not affect QSBS eligibility or restart the holding period. See How to Convert Your Delaware C-Corp to a Public Benefit Corporation.
2) Did you acquire stock at original issuance?
Ordinary secondary purchases do not qualify — stock must be acquired at original issuance directly from the corporation. Stock received by gift or inheritance may preserve QSBS status through carryover of the original holder's holding period, but secondary market purchases do not.
3) Was the corporation under the gross-assets cap when you acquired?
The company must be under the applicable cap immediately before and immediately after the issuance: $75M for stock issued after July 4, 2025 (indexed for inflation beginning in 2027), or $50M for stock issued on or before July 4, 2025. The thresholds are not interchangeable — pre-OBBBA stock cannot be retroactively tested against the higher $75M cap.
4) Does the company meet the 80% “active business” test?
At least 80% of assets must be used in the active conduct of a qualified business.
5) Have you held the stock long enough?
For stock issued on or before July 4, 2025, you must hold for more than five years for any exclusion. For stock issued after July 4, 2025, the OBBBA introduced a tiered exclusion: 50% at three years, 75% at four years, 100% at five years. The unexcluded portion (50% under the 3-year rule, 25% under the 4-year rule) is taxed at the 28% §1(h)(4) rate plus the 3.8% NIIT. The excluded portion remains NIIT-exempt under §1411(c)(1)(A)(iii).
6) Any redemptions?
Certain redemptions can taint eligibility.
Examples
LLC → C corp conversion QSBS eligibility is generally tied to the C corp shares you acquire after conversion, not a prior LLC interest.
Secondary purchase You buy shares from another shareholder. That is not QSBS.
Redemptions in the cap table A founder redemption near the time of issuance can disqualify QSBS for everyone.
FAQ
Does SAFE/note conversion count as original issuance? It can, depending on structure and documentation.
Does consulting revenue automatically disqualify QSBS? Not automatically, but the service-business risk is real.
What about state tax? Federal QSBS is one layer. States differ significantly. Washington generally follows the federal exclusion. Oregon no longer conforms — Oregon residents should treat their QSBS gain as fully taxable at the state level.
Can I sell before five years? Generally no, though special rules exist.
How much exclusion? Up to the greater of $15M (post-OBBBA, stock issued after July 4, 2025) or $10M (pre-OBBBA stock), or 10x adjusted basis (the taxpayer’s basis in the stock at original issuance (at least the FMV of any property contributed, per §1202(i)(1))) in either case.
Can later financing break QSBS for early shares? It can, especially around gross assets and redemptions.
What disqualifies stock from being QSBS?
The most common disqualifiers are: (1) the company was not a C corporation at the time of issuance (LLCs and S corps do not qualify); (2) the company's gross assets exceeded the applicable cap ($50M for pre-July 4, 2025 stock; $75M post-OBBBA) at the time of issuance; (3) the stock was purchased on the secondary market rather than directly from the company; (4) the company operates in an excluded industry such as law, medicine, consulting, or financial services; (5) the holding period was not met; or (6) the company made problematic stock redemptions near the time of issuance. Missing any single requirement eliminates the exclusion entirely.
Can LLC stock qualify as QSBS?
No. An LLC taxed as a partnership or S corporation cannot issue QSBS. Only stock issued by a domestic C corporation qualifies. If your company started as an LLC and later converted to a C corporation, only shares issued after the conversion can qualify — the prior LLC interests do not convert into QSBS retroactively. This is one of the most common planning mistakes: founders who joined or invested while the company was an LLC often assume their equity qualifies once the company converts. It does not. The clock starts on QSBS eligibility at the moment the C corporation issues new shares.
What happens if I sell QSBS before the five-year holding period?
For stock issued on or before July 4, 2025, selling before five years means you lose the exclusion entirely — the gain is taxed as ordinary capital gain. However, you may be able to defer the gain by reinvesting the proceeds into new QSBS of another qualified company within 60 days of the sale under Section 1045 rollover rules. For stock issued after July 4, 2025 (post-OBBBA), tiered exclusions apply: 50% at three years, 75% at four years, 100% at five years. If you sell at three or four years under the new rules, you still get partial exclusion, but the unexcluded portion is taxed at 28% (not the standard long-term capital gains rate) plus NIIT.
Is QSBS still available in 2026?
Yes. QSBS under Section 1202 remains in effect in 2026 and was significantly improved by the One Big Beautiful Budget Act (OBBBA) signed in 2025. The OBBBA increased the gain exclusion cap from $10M to $15M for stock issued after July 4, 2025, raised the gross assets threshold from $50M to $75M, and introduced tiered holding periods (50%/75%/100% at 3/4/5 years) for new stock. For founders issuing stock in 2026, the OBBBA changes make QSBS more accessible and more valuable than it was before. Confirming eligibility early — before the company grows past the gross assets cap — is the most important step.
Documents to gather
- Incorporation + conversions
- Cap table
- Stock issuance docs
- Financials around issuance
- Redemption records
For a deeper dive, see the Complete Guide to QSBS & Section 1202.
1. Entity Requirement: Is It a C Corporation?
☐ The issuing company is a domestic C corporation (not an S-corp, LLC, partnership, or foreign entity)
☐ The company was a C corporation at the time the stock was issued
☐ The company has not elected S-corp status at any point during your holding period
Why this matters: LLCs and S-corps cannot issue QSBS. If your company started as an LLC and converted to a C-corp, only stock issued after the conversion qualifies. This is the single most common reason stock fails to qualify.
2. Gross Asset Test: Was the Company Small Enough?
☐ At the time your stock was issued, the corporation’s aggregate gross assets were $75 million or less (post-OBBBA; $50 million for pre-July 4, 2025 stock)
☐ Gross assets include cash plus the adjusted basis of all property held by the corporation
☐ You have documentation of the company’s asset level at the time of issuance
Why this matters: The test is applied at the moment of issuance. A company can grow far beyond $75 million after your stock is issued and you still qualify. But if the company was at $76 million when your shares were issued, those shares are permanently disqualified.
3. Original Issuance: Did You Get the Stock Directly from the Company?
☐ You acquired the stock directly from the corporation (not purchased from another shareholder on the secondary market)
☐ You acquired it in exchange for money, property, or services
☐ If acquired for services, you were an employee, director, or contractor of the company
Why this matters: Stock bought on the secondary market does not qualify, no matter how long you hold it.
4. Active Business Requirement
☐ During substantially all of your holding period, at least 80% of the company’s assets were used in the active conduct of a qualified trade or business
☐ The company is not in an excluded industry (see list below)
☐ No more than 10% of the company’s assets were held in passive investments (stocks, bonds, real estate held for investment)
Excluded Industries (QSBS Does NOT Qualify)
✘ Professional services: law, medicine, accounting, consulting, engineering, financial services, architecture
✘ Banking, insurance, or lending
✘ Farming or mining
✘ Hotels, motels, or restaurants
✘ Any business where the principal asset is the reputation or skill of employees
Most technology, SaaS, manufacturing, e-commerce, and retail businesses qualify. The excluded industry list is broader than many people realize — a software company that also does consulting may not qualify depending on the revenue mix.
5. Holding Period
☐ For 100% exclusion: held for 5+ years (post-OBBBA stock issued after July 4, 2025)
☐ For 75% exclusion: held for 4+ years
☐ For 50% exclusion: held for 3+ years
☐ For pre-OBBBA stock (issued before July 4, 2025): held for 5+ years for 100% exclusion
☐ You know your exact acquisition date and can document it
If you need to sell before reaching 5 years, see Section 1045 Rollovers: How to Defer QSBS Gains.
6. Gain Cap
☐ Your gain does not exceed the greater of: $15 million per issuer (post-OBBBA) or 10x your adjusted basis (basis at original issuance (at least the FMV of any property contributed, per §1202(i)(1))) in the stock
☐ For pre-OBBBA stock: the cap is $10 million or 10x basis
☐ If your gain exceeds the cap, you have considered stacking strategies
For strategies to multiply the exclusion beyond $15 million, see QSBS Stacking: How to Multiply the Exclusion with Trusts and Family Gifts.
7. Redemption Test
☐ The company has not redeemed stock from you or a related person in the 2 years before or after your stock issuance in a transaction that significantly reduced your percentage ownership
☐ The company has not redeemed more than 5% of its stock in aggregate during the 1 year before or after your issuance
Why this matters: Excessive stock buybacks can disqualify QSBS.
8. Documentation Checklist
Keep these records throughout your holding period:
☐ Stock purchase agreement or grant documentation showing original issuance
☐ Board resolutions approving the stock issuance
☐ Company financial statements showing gross assets at time of issuance
☐ Records showing the company met the active business requirement throughout your holding period
☐ Evidence that no more than 10% of assets were in passive investments
☐ 83(b) election filing confirmation (if restricted stock)
☐ 409A valuation at time of issuance (if applicable)
☐ Records of any stock redemptions by the company
The IRS can challenge QSBS claims years after a sale. Contemporaneous documentation is your best defense.
Washington State Bonus
If your stock qualifies as QSBS under Section 1202, the excluded gain is also exempt from Washington's capital gains tax (9.9% on gains above $1M, 7% beneath, after a ~$270K standard deduction) and the new 9.9% income tax (ESSB 6346, effective 2028). The Washington legislature considered decoupling from the federal exclusion (SB 6229/HB 2292) but those bills did not pass.
For comprehensive WA tax planning strategies, see the Washington State Income Tax Planning Guide.
Need a letter, not just a checklist?
If you need to QSBS attestation letter — flat-fee engagement drafted and signed by counsel — covering the gross-assets test, active-business analysis, redemption history, and OBBBA tranche bifurcation — we offer flat-fee engagements after a short intake call.
Get the Template
Once you've confirmed eligibility, get it in writing. Most companies send shareholders a confirmation letter at issuance covering the same factual points you just walked through. We sell the template — five backward-looking confirmations, downloadable .docx, $99.
Questions about whether your stock qualifies? Book a 20-minute intro call.
Get the complete QSBS analysis: The Complete Guide to QSBS & Section 1202.
Have questions about your specific situation?
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