Glossary

Qualified Small Business Stock

A Qualified Small Business (QSB) is any active domestic C corporation whose assets don't go over $75 million on or after the issuance of stock.


Qualified small business stock (QSBS) refers to shares of a qualified small business (QSB) as defined by the Internal Revenue Code (IRC).


QSBS is treated favorably for capital gains purposes if both the investor and the company meet certain requirements.


How much of a tax break the investor will receive depends on when they purchased the stock and how long they held it.


Investors who sell their QSBS before the end of the required holding period can defer capital gains by investing the proceeds in another company's QSBS.


Key rules:

  • Exclusion tiers: 50% of gains excluded after 3 years, 75% after 4, and 100% after 5.

  • Per-company cap: Up to $15 million in excluded gains per shareholder (or 10x basis, whichever is greater).

  • Eligible sectors: Only certain types of companies fall under the category of a QSB. Technology, retail, wholesale, and manufacturing typically qualify. Finance, hospitality, personal services, farming, and mining generally do not.