QSBS (Section 1202): The $10 Million Tax-Free Exit Ticket
Tax Tips / Exit Strategy
QSBS (Section 1202): The $10 Million Tax-Free Exit Ticket
💡 Executive Summary
- Problem: Selling your startup typically triggers ~23.8% Federal Capital Gains Tax (+ State Tax).
- Solution: IRC § 1202 (QSBS) allows founders to exclude 100% of the gain.
- Result: Up to $10 Million (or 10x your basis) of profit is completely tax-free.
⚠️ STRUCTURE MATTERS
QSBS is only for C-Corporations. LLCs and S-Corps do not qualify. You must hold the stock for at least 5 years before selling. Converting an LLC to C-Corp “resets” the 5-year clock.
QSBS is only for C-Corporations. LLCs and S-Corps do not qualify. You must hold the stock for at least 5 years before selling. Converting an LLC to C-Corp “resets” the 5-year clock.
For Founders and Angel Investors, QSBS is the single most powerful tax incentive in the US Code. It rewards risk-taking by effectively making the “Founder’s Exit” tax-exempt up to a massive cap.
🧐 Core Definition: “Small Business”
To qualify, the company’s gross assets must be under $50 Million at the time the stock is issued. If the company grows to $50B later, you still keep the QSBS status as long as you got in early.
To qualify, the company’s gross assets must be under $50 Million at the time the stock is issued. If the company grows to $50B later, you still keep the QSBS status as long as you got in early.
Performance Simulation
Exit Scenario ($10M Gain)
Standard Exit (Taxable)
~$2.4M Federal Tax
$7.6M Net
QSBS Exit (Section 1202)
$0 Federal Tax
$10.0M Net
The “QSBS” Checklist
| Requirement | Detail | Status |
|---|---|---|
| Entity Type | Domestic C-Corporation | Mandatory |
| Asset Cap | Under $50M (at issuance) | Mandatory |
| Hold Period | Minimum 5 Years | Critical |
| Source | Original Issuance (Not Secondary) | No Resale Buy |
“QSBS is the government’s way of saying: ‘If you build the next big thing, the first $10 million is on the house.'”
🔗 Related BMT Playbooks (Internal)
🛡️ Advanced: “Stacking” QSBS with Trusts (Multiplying the $10M Cap) 📉 Foundation: Section 83(b) Election for Founders ✅ Plan B: Section 1045 Rollover (If sold before 5 years)🏛️ Institutional Resources (External)
📜 Legal Text: IRC § 1202 (Partial Exclusion for Stock) ⚖️ IRS Guidance: Private Letter Ruling on QSBS 📜 Legal Text: IRC § 1045 (Rollover of Gain)
BMT designs for tax reality, not theory.