QSBS Advisor Match

QSBS Eligibility Checklist: Does Your Startup Stock Qualify?

Section 1202 has two layers of tests — one about the company, one about you. Both must be satisfied at the time your specific shares were issued. Below is the full checklist, plus the traps that quietly disqualify otherwise-clean positions. None of this is something your company will verify for you.

The key idea: almost every QSBS test is measured at the moment your stock was issued — not today, not at sale. A company that's worth $5B now can still have issued you qualifying stock when it had $40M in assets. And a single disqualifying fact at issuance can't be fixed after the fact. Get the issuance-date facts confirmed early.

Part 1 — Company-level tests

The company must meet all of these at the time it issued the stock to you:1

1. Domestic C-corporation

The issuer must be a U.S. C-corporation. LLCs, S-corps, and partnerships do not qualify. If the company was an LLC or S-corp when you got your interest and later converted to a C-corp, only stock issued after the conversion can qualify — and your holding period and basis reset to the conversion.

2. Gross assets ≤ $75M at issuance

The company's aggregate gross assets must not have exceeded $75M (post-OBBBA; $50M for stock issued on or before July 4, 2025) at any point before, and immediately after, your stock was issued. Assets are measured at tax basis, with contributed property counted at fair market value — so this is about the cash and property the company holds, not its valuation. A company can be worth $1B and still have issued QSBS when it was under the threshold.2

3. Active qualified business (the 80% test)

At least 80% of the company's assets (by value) must be used in the active conduct of a qualified trade or business. Pure holding companies fail. And certain fields are categorically excluded:

Most technology companies qualify — software, SaaS, hardware, biotech, fintech infrastructure are active businesses, not personal-service firms. The gray zone is at the edges: a health-tech SaaS company is different from a healthcare staffing firm. Borderline sectors need a formal analysis.

Part 2 — Shareholder-level tests

Even if the company qualifies, you must also satisfy these:1

4. Original issuance

You must have acquired the stock directly from the company — for cash, property, or services — not on a secondary market. Founders' shares, exercised options, and stock bought in a priced round all count. Shares purchased from another shareholder, or on the public market after IPO, do not.

5. Eligible holder

The holder must be a non-corporate taxpayer: an individual, a trust, or a pass-through. A C-corporation holding the stock does not get §1202 treatment. If you hold through a partnership or LLC, the exclusion passes through only if you were a partner when the entity acquired the stock.

6. Holding period

For stock issued after July 4, 2025, the post-OBBBA tiers apply: 3 years for 50%, 4 years for 75%, 5+ years for 100%. Earlier stock needs a full 5 years for any exclusion. The clock starts at original issuance — and for early-exercised options with a timely 83(b) election, that's the exercise date, often well before vesting.

83(b) and the clock. If you early-exercise unvested options and file an 83(b) election within 30 days, the IRS treats the exercise date as your acquisition date. That can start your QSBS clock years earlier — frequently the difference between hitting 5 years before a sale and missing it. If you early-exercised, confirm your 83(b) was filed on time and that you have the IRS confirmation.

Part 3 — The traps that disqualify clean positions

The redemption rule

If the company redeemed (bought back) more than a de minimis amount of stock from any shareholder within a window around your issuance — generally 2 years before to 2 years after for significant redemptions, and 1 year for related-party redemptions — your stock can be disqualified, even though the buyback had nothing to do with you. This matters most at companies running tender offers, secondary programs, or founder-share buybacks.1

S-corp / LLC conversion timing

Stock issued while the company was an S-corp or LLC does not qualify. Only shares issued after a proper conversion to C-corp count, and the clock and basis run from the conversion. Many "we were an LLC for the first two years" startups have founders who assume they qualify from day one — they don't.

The $75M ceiling is frozen at issuance

Growing past $75M later does not disqualify already-issued QSBS. But if the company was already over the threshold when your specific tranche was issued — even if it crossed the line the week before your grant — that tranche doesn't qualify. Different grant dates can have different answers.

How to verify your status

  1. Request a QSBS representation or cap-table summary from the company confirming C-corp status and gross assets under the threshold at your issuance dates.
  2. Confirm the business activity isn't in an excluded category.
  3. Pull your own documents — grant agreement, exercise records, 83(b) confirmation — to establish original issuance and your holding-period start.
  4. Have a CPA or tax attorney sign off before you build any plan around the exclusion. Given the dollars, a formal review is cheap insurance.

Related reading

Get a real eligibility read — before the deal closes

A checklist tells you what to look for; a specialist tells you whether you actually qualify, against your specific issuance dates and cap table. Get matched with a fee-only advisor who does QSBS eligibility work with tax counsel. No obligation.

Sources

  1. IRC § 1202 — Partial exclusion for gain from certain small business stock (qualified-business, redemption, and eligible-holder rules).
  2. The Tax Adviser — QSBS gets a makeover: Sec. 1202's new look (Nov 2025) ($75M threshold, post-OBBBA tiers).
  3. IRS — Section 83(b) Election and the 30-day filing requirement.

Every test is measured at the issuance date of your specific shares. Post-OBBBA thresholds apply to stock issued after July 4, 2025. Confirm eligibility with qualified tax counsel before relying on it.