The $10 Million Tax Holiday: Qualified Small Business Stock (QSBS)
The $10 Million Tax Holiday: Qualified Small Business Stock (QSBS)
The greatest gift the IRS ever gave to founders. How Section 1202 allows you to sell your startup stock for a massive profit and pay absolutely zero federal capital gains tax.
Executive Summary
- The Golden Rule (Section 1202): If you hold “Qualified Small Business Stock” (QSBS) for more than 5 years, you can exclude up to 100% of the capital gains from federal tax.
- The Limit: The exemption is capped at the greater of $10 million OR 10x your cost basis. For most founders with near-zero basis, it effectively means the first $10M of profit is tax-free.
- Eligibility Checklist:
1. Must be a Domestic C-Corporation (No LLCs/S-Corps).
2. Gross assets must be under $50M when stock is issued.
3. Must be an active business (No hedge funds, hotels, restaurants, or law firms).
4. You must acquire stock at “Original Issuance” (not bought on secondary market).
QSBS Stacking (Multiplier Effect)
Advanced Move: The $10M limit applies per taxpayer. If you gift stock to 3 separate Irrevocable Trusts (for your kids) before the sale, each trust may claim its own $10M exemption.
👉 Result: $10M (You) + $10M (Trust A) + $10M (Trust B) = $30M Tax-Free Exemption. This is called “Stacking.”
Mechanic: The Exemption Engine
$10M+
Tax-Free Cap
5 Years
Holding Period
C-Corp
Required Entity
Section 1045
Rollover Option
Simulation: Selling a Startup for $15M (QSBS vs. Non-QSBS)
Net Cash After Federal Tax
| Feature | Standard Stock (LLC/Public) | QSBS (Qualified C-Corp) |
|---|---|---|
| Federal Tax Rate | 20% + 3.8% NIIT | 0% (up to limit) |
| State Tax | Taxable | Taxable (except in CA, PA, NJ…) |
| Rollover (Deferral) | None | Yes (Section 1045 allows reinvestment) |
“Founders often choose LLCs to avoid double taxation, forgetting that Section 1202 makes C-Corps the only logical choice for high-growth ventures. Paying a little corporate tax today is the price of a $10M tax holiday tomorrow.”
Essential Resources
INTERNAL
BMT Playbooks