What Is the 50%, 75%, and 100% QSBS Exclusion? (w/ Examples) + FAQs

This article reflects federal rules and general state-conformity rules as of June 2026 and covers tax years 2025 and 2026. Tax law changes — confirm current figures before you file.

Quick Answer

The QSBS exclusion lets you exclude 50%, 75%, or 100% of capital gains from selling qualified small business stock under Internal Revenue Code Section 1202. For stock acquired after July 4, 2025, the tier depends on how long you hold it: 50% at 3 years, 75% at 4 years, and 100% at 5 years.

What This Means for You Right Now

If you founded a startup, invested early in one, or hold shares in a small C corporation, Section 1202 may let you walk away from a sale owing little or no federal tax on millions of dollars in gain. The 2025 law known as the One Big Beautiful Bill Act (OBBBA), signed July 4, 2025, rebuilt how the 50%, 75%, and 100% tiers work — and which percentage you get now turns on when you bought your stock and how long you hold it, not just a flat five-year wait.

The stakes are real and time-sensitive. The wrong holding date can cost you a 28% tax rate instead of zero, and a single missed requirement can void the entire exclusion. According to Carta data on QSBS, the benefit can shelter millions per shareholder, which is why founders and investors plan years ahead to protect it.

Here is what you will learn:

💰 How the 50%, 75%, and 100% tiers actually work under both the old and new rules
📅 Why your stock’s acquisition date decides which rulebook applies to you
🧮 Worked dollar examples showing exactly how much tax you save (and the 28% trap)
🏢 The company and shareholder tests your stock must pass to qualify
🗺️ Whether your state taxes the gain even when the IRS does not

QSBS in Plain English

Qualified small business stock (QSBS) is stock in a small U.S. C corporation that meets the tests in Section 1202. When you sell it after holding it long enough, you can exclude part or all of your capital gain from federal income tax.

Congress created this break in 1993 to push money into young companies. The deal is simple: invest in a real, active small business, take the risk, hold the stock, and the government waives tax on a large chunk of your reward. The exclusion is one of the most powerful tax breaks in the code for founders and early investors.

The catch is that QSBS is full of strict, technical rules. You must buy the right kind of stock, from the right kind of company, in the right way, and hold it for the right amount of time. Miss one element and the exclusion can vanish. The rest of this guide breaks each piece down.

The Two Rulebooks: Why Your Acquisition Date Matters

There is no single “50/75/100” rule. There are two completely different versions of Section 1202, and the one that applies to you depends on a single fact: did you acquire your stock on or before July 4, 2025, or after?

The OBBBA changed the law only for stock acquired after July 4, 2025. Stock you bought on or before that date stays under the old rules forever, even if you sell it years from now. This is the single most misunderstood point in QSBS, so we cover both rulebooks below.

The Old Rules (Stock Acquired On or Before July 4, 2025)

Under the legacy version of Section 1202, the exclusion percentage is fixed by your acquisition date, and you must hold the stock for more than five years to claim any exclusion at all. The percentage never changes based on a shorter hold.

The consequence of misreading this is steep: if you sell legacy stock at four years thinking you “qualify for 75%,” you actually qualify for nothing under the old rules and owe full tax on the gain. The five-year clock is a hard wall. For example, an angel investor who bought shares in 2015 and sells in 2026 gets the 100% exclusion because the stock was acquired after September 27, 2010, and held over five years.

A common misconception is that the old 50/75/100 tiers are about holding period. They are not — under the legacy rules they are about the date you bought, per the Grant Thornton summary. What you should do: pull your stock certificate or cap-table record, confirm the exact issuance date, and file the legacy date to your accountant.

Stock Acquisition Date (Legacy Rules)	Maximum Exclusion (after 5+ year hold)
Before Feb. 18, 2009	50%
Feb. 18, 2009 – Sept. 27, 2010	75%
Sept. 28, 2010 – July 4, 2025	100%

The New Rules (Stock Acquired After July 4, 2025)

For stock acquired after July 4, 2025, the OBBBA replaced the acquisition-date tiers with a tiered holding period. Now the percentage you get rises the longer you hold, and you no longer have to wait a full five years to exclude something.

This is a major win for early liquidity. Under new Section 1202(a)(5), holding at least three years gets you 50%, at least four years gets 75%, and at least five years gets the full 100%. A founder who sells at year three under the new rules excludes half the gain — something impossible under the old all-or-nothing five-year wall.

The misconception here is that everyone now qualifies for early exclusion. They do not — only stock acquired after July 4, 2025 uses these tiers. What you should do: if you are issuing or buying new stock, document the post-July-4-2025 issuance date, because it unlocks the flexible new ladder.

Holding Period (New Rules)	Maximum Exclusion
At least 3 years	50%
At least 4 years	75%
At least 5 years	100%

The Three Big Numbers OBBBA Changed

Beyond the tiers, the OBBBA moved three dollar figures that decide whether you qualify and how much you can shelter. Each applies only to stock issued after July 4, 2025; older stock keeps the old numbers.

The per-issuer exclusion cap rose from $10 million to $15 million, and it will be indexed for inflation starting in 2027. The company gross-asset ceiling rose from $50 million to $75 million, also indexed from 2027. The 10x-basis cap stayed the same — you can still exclude the greater of the dollar cap or 10 times your adjusted basis in the stock.

The consequence of the asset-ceiling change is that bigger, better-funded startups now qualify. A company that raised $60 million and would have blown past the old $50 million limit can still issue QSBS under the $75 million ceiling. What you should do: have the company confirm its aggregate gross assets stayed under the limit immediately before and right after each stock issuance, because crossing it permanently disqualifies all later stock.

Feature	Old Rules (on/before July 4, 2025)	New Rules (after July 4, 2025)
Holding period for exclusion	More than 5 years (flat)	3 yrs (50%), 4 yrs (75%), 5 yrs (100%)
Per-issuer dollar cap	$10 million	$15 million (indexed from 2027)
Company gross-asset ceiling	$50 million	$75 million (indexed from 2027)
Alternative cap	10× adjusted basis	10× adjusted basis (unchanged)

Which Situation Applies to You?

The right path depends on a few facts about your stock. Use this guide to find your section.

You bought your stock on or before July 4, 2025: You are under the old rules. You need a full 5-year hold, your percentage is set by acquisition date, and your cap is $10 million / $50 million assets.
You bought (or will buy) stock after July 4, 2025: You are under the new rules. You can claim 50% at 3 years, 75% at 4, 100% at 5, with a $15 million cap and $75 million asset ceiling.
You own an LLC or S corporation: You do not have QSBS today, because only C corporation stock qualifies. Talk to an advisor about converting before issuing new stock.
You may sell before hitting your tier: Look at a Section 1045 rollover to defer gain into replacement QSBS.
Your company is in health, law, finance, consulting, or similar services: You likely fail the “qualified trade or business” test and do not have QSBS.

How the Math Works: Worked Examples

QSBS math has three steps: find your gain, find your exclusion cap, then apply your tier percentage. The part you exclude is federally tax-free; the part you cannot exclude is taxed — and that last part hides a trap.

The trap is the rate. Per the Tax Adviser analysis, any non-excluded QSBS gain (the part you do not shelter at the 50% or 75% tiers) is taxed at a 28% capital-gains rate, not the usual 15% or 20%, and the 3.8% net investment income tax can apply on top. This is why the 100% five-year tier is almost always the best outcome.

Example 1: 100% Exclusion (Five-Year Hold)

Maria, a founder, acquires QSBS in August 2025 for $100,000 and sells in 2030 for $8.1 million. Her gain is $8 million, held five-plus years, so she is in the 100% tier. Her cap is the greater of $15 million or 10× her $100,000 basis ($1 million) — so $15 million. Her $8 million gain is under the cap and fully excluded. Federal tax owed: $0. Compared with a 23.8% rate on $8 million, she saves roughly $1.9 million.

Example 2: 75% Exclusion (Four-Year Hold)

David buys QSBS in September 2025 for $50,000 and sells in late 2029 for $4.05 million — a $4 million gain held just over four years. He is in the 75% tier, so $3 million is excluded and $1 million is taxable. That $1 million is taxed at 28% (plus 3.8% NIIT = 31.8%), costing about $318,000. Waiting one more year to hit 100% would have saved that entire amount.

Example 3: 50% Exclusion (Three-Year Hold)

Priya, an early investor, buys QSBS in July 2025 for $200,000 and sells at year three in 2028 for $2.2 million — a $2 million gain. She is in the 50% tier, so $1 million is excluded and $1 million is taxable at 28% plus 3.8% NIIT, costing about $318,000. She gets fast liquidity but pays for selling early.

The Qualification Tests You Must Pass

Before any tier matters, your stock must be QSBS. The Grant Thornton requirements split into company-level and shareholder-level tests.

Company-Level Tests

The issuer must be a domestic C corporation the entire time you hold the stock. Its aggregate gross assets must stay at or below $50 million (old) or $75 million (new) immediately before and after issuing your stock. And at least 80% of its assets must be used in an active qualified trade or business.

The consequence of failing any of these is total: your stock is simply not QSBS and gets no exclusion. For example, if a startup converts from an LLC to a C corp, your QSBS clock and qualification start at the conversion, not at the original founding. What you should do: get a written QSBS attestation from the company at issuance and at sale.

Excluded Businesses

Certain fields can never hold QSBS. These include health, law, engineering, architecture, accounting, actuarial science, performing arts, consulting, athletics, financial services, and brokerage — plus banking, insurance, financing, leasing, investing, farming, mineral extraction, and hotels or restaurants.

The reason is that Section 1202 targets product and technology companies, not service firms built on one person’s reputation. A common misconception is that any small startup qualifies; a two-person consulting LLC that incorporates does not. What you should do: confirm your company’s primary activity is a qualified trade before you count on the exclusion.

Shareholder-Level Tests

You must not be a C corporation yourself, you must have received the stock directly from the company at original issuance, and you must have paid with cash, property, or services — not by buying it from another shareholder. You must also meet the holding period for your rulebook.

The consequence of buying shares on the secondary market is that they usually are not QSBS in your hands, even if they were for the original owner. What you should do: keep your subscription agreement and proof of original issuance, because the IRS puts the burden of proof on you.

How to Claim It: Forms and Filing

You claim the QSBS exclusion on your federal return for the year you sell. There is no separate election form — you report it through your normal capital-gains schedules.

Report the sale on Form 8949, entering the full proceeds and basis, then enter the excluded amount as a negative adjustment in column (g) with code “Q” in column (f). The totals flow to Schedule D, then to your Form 1040. If you are doing a Section 1045 rollover instead, you report the deferral on the same forms with code “R.”

The deadline is your regular return due date — generally April 15 of the year after the sale, or October 15 with an extension. Keep your records (issuance docs, the company’s QSBS attestation, gross-asset proof) for at least seven years, because QSBS claims draw IRS scrutiny.

Mistakes to Avoid

Selling before your tier vests. Sell legacy stock at four years and you get zero exclusion, owing full tax on the whole gain.
Assuming the new tiers apply to old stock. Stock acquired on/before July 4, 2025 needs five years no matter what; claiming 50% at three years is wrong and triggers tax plus penalties.
Ignoring the 28% rate. The non-excluded portion at the 50% and 75% tiers is taxed at 28%, not 20%, so partial exclusions cost more than people expect.
Holding stock in an LLC or S corp. Only C corporation stock qualifies; LLC interests and S corp shares earn no exclusion.
Buying shares secondhand. Secondary-market shares usually are not QSBS in your hands because they were not issued to you directly.
Forgetting state tax. States like California do not follow Section 1202, so you can owe full state tax on a federally tax-free gain.
Missing the gross-asset ceiling. If the company ever exceeds $50 million (or $75 million) in gross assets before your issuance, your stock never qualifies.
Losing your paperwork. Without proof of original issuance and asset levels, the IRS can deny the exclusion entirely.

Does Your State Tax the Gain?

A federal exclusion does not mean a state exclusion. You must check your state separately, because conformity to Section 1202 varies widely.

Most states with an income tax follow the federal rule and exclude the same gain. But California does not conform to Section 1202 and taxes the full gain at state rates, and some states only partially conform or cap the benefit. States with no income tax — such as Texas, Florida, Washington, and Nevada — give you the full federal benefit with no state layer at all.

The consequence is large for high-tax states: a Californian with an $8 million federally excluded gain can still owe well over $1 million in state tax. What you should do: confirm your state’s conformity for the year of sale before you assume the gain is tax-free, and consider your state of residence at the time of the sale.

Pros and Cons

Pro — Massive tax savings. Excluding 100% of up to $15 million per issuer can save millions, because none of that gain hits federal tax.
Pro — Faster access under new rules. The 3- and 4-year tiers give post-2025 investors partial exclusion without a full five-year wait.
Pro — Generous 10x-basis cap. Large investments can shelter far more than $15 million, since the cap is the greater of the dollar limit or 10× basis.
Pro — Higher company ceiling. The $75 million asset limit lets bigger startups issue QSBS, widening who can benefit.
Pro — Rollover safety net. Section 1045 lets you defer gain if you must sell before vesting, preserving the benefit.
Con — Strict, technical rules. One failed test voids the whole exclusion, because qualification is all-or-nothing per share lot.
Con — Only C corporations qualify. LLC and S corp owners get nothing unless they convert, which resets the clock.
Con — The 28% rate trap. Partial-tier gains are taxed at 28%, not 20%, raising the cost of selling early.
Con — State tax risk. Non-conforming states like California tax the full gain, eroding the federal break.
Con — Heavy recordkeeping. You bear the proof burden, so weak documentation can cost you the exclusion in an audit.

Do’s and Don’ts

Do confirm your exact acquisition date, because it decides which rulebook and percentage apply.
Do get a written QSBS attestation from the company, since you must prove qualification at issuance and sale.
Do model the 5-year tier before selling early, because the 28% rate often makes waiting worth far more.
Do check your state’s conformity, as a federally tax-free gain can still be fully taxed at home.
Do consider a Section 1045 rollover if you must sell before vesting, to defer rather than lose the benefit.
Don’t assume the new tiers cover old stock, because pre-July-5-2025 shares need a full five-year hold.
Don’t buy QSBS on the secondary market expecting the break, since it usually is not QSBS in your hands.
Don’t ignore the gross-asset ceiling, because one breach permanently disqualifies later issuances.
Don’t hold QSBS in an LLC or S corp, as the entity type alone disqualifies the gain.
Don’t toss your records after filing, because QSBS claims invite audits years later.

When to Call a Professional

QSBS rewards careful planning, and the dollar amounts make professional help cheap by comparison. Bring in a CPA or tax attorney when your gain approaches the dollar cap, when your company is converting entity types, or when your holding period is near a tier boundary.

A good advisor will verify qualification, document the gross-asset history, time your sale around the tiers, and coordinate federal and state treatment. Expect to pay a few hundred dollars for a basic return with a clean QSBS sale, and several thousand for complex multi-entity or rollover planning — a small fraction of a seven-figure tax saving. This article is educational and not a substitute for advice tailored to your situation.

What to Do Next

Pull your stock records and confirm the exact original issuance date and whether it is before or after July 4, 2025.
Get a QSBS attestation from the company confirming C-corp status, the gross-asset history, and the active-business test.
Identify your tier and cap based on your rulebook, holding period, and basis.
Check your state’s conformity for the year you plan to sell.
Model the after-tax result at each tier, weighing the 28% rate against waiting for 100%.
Report the sale on Form 8949 with code “Q” and carry it to Schedule D when you file.
Call a CPA or tax attorney before you sign a sale agreement if the gain is large or the facts are complex.

Frequently Asked Questions

What is the 50%, 75%, and 100% QSBS exclusion?

It is the share of capital gain you can exclude from federal tax on qualified small business stock under Section 1202. For stock acquired after July 4, 2025, you get 50% at a 3-year hold, 75% at 4 years, and 100% at 5 years.

Does the new 3/4/5-year tier apply to my older stock?

No. The tiered holding period applies only to stock acquired after July 4, 2025. Stock acquired on or before that date still needs a holding period of more than five years to claim any exclusion.

What is the maximum QSBS exclusion per issuer?

$15 million for stock acquired after July 4, 2025 (indexed for inflation starting 2027), or $10 million for earlier stock. You can instead exclude 10 times your adjusted basis if that is greater.

Are LLC or S corporation owners eligible for QSBS?

No. Only stock in a domestic C corporation qualifies. LLC and S corporation interests do not, though converting to a C corporation can let you issue qualifying stock going forward.

Is the non-excluded gain taxed at the normal capital-gains rate?

No. The non-excluded portion of QSBS gain is taxed at a 28% rate, not the usual 15% or 20%, and the 3.8% net investment income tax may also apply.

What company size qualifies for QSBS?

$75 million or less in aggregate gross assets for stock issued after July 4, 2025 (indexed from 2027), or $50 million or less for earlier stock, measured immediately before and after the stock issuance.

Which businesses cannot issue QSBS?

Service and certain capital-intensive fields, including health, law, accounting, consulting, financial and brokerage services, banking, insurance, farming, mining, and hotels or restaurants, are excluded from qualified-trade-or-business treatment.

Can I avoid tax if I sell QSBS too early?

Yes, sometimes, through a Section 1045 rollover. If you held the stock at least six months, you can roll the proceeds into new QSBS within 60 days to defer the gain rather than lose the benefit.

Do all states honor the QSBS exclusion?

No. Conformity varies by state. California does not follow Section 1202 and taxes the full gain, while no-income-tax states like Texas and Florida impose no state tax at all.

What forms do I use to claim the QSBS exclusion?

Form 8949 and Schedule D. Report the sale on Form 8949, enter the excluded amount as a negative adjustment with code “Q,” and carry the result to Schedule D and your Form 1040.

When did the OBBBA QSBS changes take effect?

For stock acquired after July 4, 2025. The One Big Beautiful Bill Act, signed July 4, 2025, created the new tiers, the $15 million cap, and the $75 million asset ceiling for stock issued after that date.

Is the QSBS exclusion permanent?

Yes, the exclusion itself has no scheduled sunset. Unlike many temporary 2025-law provisions, the OBBBA QSBS changes are permanent amendments to Section 1202, with the dollar limits indexed for inflation starting in 2027.

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