About this programme
Section 1202 of the Internal Revenue Code lets a non-corporate taxpayer exclude part of the gain from selling or exchanging Qualified Small Business (QSB) stock, provided the stock has been held for more than 5 years. It isn't a grant or a filed application — it's a capital-gains exclusion claimed on the tax return in the year the stock is sold, using Form 8949 and Schedule D.
The exclusion percentage depends on when the stock was acquired. Stock acquired on or before February 17, 2009 gets a 50% exclusion; stock acquired after February 17, 2009 and before September 28, 2010 gets 75%; stock acquired after September 27, 2010 gets 100%. A separate 60% exclusion applies to certain empowerment-zone business stock acquired after December 21, 2000 and before February 18, 2009, for gain attributable to periods on or before December 31, 2018.
The One Big Beautiful Bill Act (signed July 4, 2025) raised the corporate-level gross-assets test a qualified small business must meet: $75 million or less, versus $50 million or less for stock issued on or before July 4, 2025. IRS instructions confirm this threshold change; other mechanics specific to stock acquired after July 4, 2025 are not yet reflected in the current Schedule D instructions and are not stated here.
Provider: Internal Revenue Service, under IRC Section 1202 as amended by the One Big Beautiful Bill Act, 2025.
How it works
The corporation issuing the stock must be a domestic C corporation with total gross assets of $75 million or less (or $50 million or less, for stock issued on or before July 4, 2025) at all times before and immediately after the stock is issued.
During substantially all of the shareholder's holding period, the corporation must remain a C corporation and use at least 80% of the value of its assets in the active conduct of one or more qualified businesses.
The stock must be QSB stock: originally issued after August 10, 1993, acquired by the shareholder at original issue in exchange for money, other property, or as compensation for services (not acquired on the secondary market).
The taxpayer must hold the stock for more than 5 years before selling or exchanging it to claim the exclusion; the excludable percentage of the gain is set by the stock's acquisition date (50%, 60%, 75%, or 100%, per the tiers above).
The exclusion is claimed at the time the gain is reported: on Form 8949, the sale is reported as it would be without the exclusion, then 'Q' is entered in column (f) and the excluded gain is entered as a negative number in column (g), flowing through to Schedule D.
Who can apply
Available to non-corporate taxpayers (individuals, and pass-through owners via partnerships/S corps) who acquired stock directly from a C corporation at original issue, not stock bought from another shareholder on a secondary market.
The issuing corporation cannot be certain kinds of businesses. IRS instructions specifically exclude businesses involving services in the fields of health, law, engineering, architecture, accounting, actuarial science, performing arts, consulting, athletics, financial services, or brokerage services from qualifying as a 'qualified business' for this purpose.
The corporation must have met the gross-assets ceiling ($75 million, or $50 million for stock issued on or before July 4, 2025) at issuance, and must have used at least 80% of its assets in an active qualified business for substantially all of the holding period.
How to apply
- There is no application or registration — eligibility is determined by how and when the stock was acquired and by the issuing corporation's status, and is assessed at the time of sale.
- When the stock is sold after the required holding period, report the sale on Form 8949 as it would be reported without the exclusion.
- Enter code 'Q' in column (f) of Form 8949 for that transaction.
- Enter the excluded portion of the gain as a negative number in column (g) of Form 8949; the net figure carries to Schedule D.
- Consult the Instructions for Schedule D (Form 1040) and Instructions for Form 8949 for the applicable exclusion percentage based on the stock's acquisition date.
Documents you’ll typically need
- Form 8949 (Sales and Other Dispositions of Capital Assets)
- Schedule D (Form 1040)
- Records establishing original issue date, acquisition method, and holding period of the QSB stock
Frequently asked
What is QSBS / Section 1202 stock?
It's stock issued directly by a domestic C corporation that meets IRS qualified-small-business tests (gross-assets ceiling, active-business use, non-excluded industry) at the time of issuance. Holding it for more than 5 years lets the shareholder exclude part of the gain on sale from federal income tax.
How much of the gain can be excluded?
It depends on when the stock was acquired: 50% for stock acquired on or before February 17, 2009; 75% for stock acquired after February 17, 2009 and before September 28, 2010; and 100% for stock acquired after September 27, 2010. A 60% rate applies to certain empowerment-zone stock under separate rules.
How long do I need to hold the stock?
The Section 1202 exclusion applies only to QSB stock held for more than 5 years, per the IRS Schedule D instructions.
Did the One Big Beautiful Bill Act (2025) change this?
Yes — it raised the corporate gross-assets test a qualified small business must meet from $50 million to $75 million, as confirmed in the current IRS Schedule D instructions. That instruction text ties the $50 million threshold to stock issued on or before July 4, 2025, and $75 million to stock issued after. We have not been able to confirm other post-July-2025 mechanics (such as any change to holding-period tiers) directly on IRS.gov, so they are not stated here.
What kind of companies do NOT qualify as a qualified business?
The IRS excludes businesses involving services in health, law, engineering, architecture, accounting, actuarial science, performing arts, consulting, athletics, financial services, or brokerage services from the definition of a qualified business for Section 1202 purposes.
How do I claim the exclusion on my tax return?
Report the sale on Form 8949 as you would without the exclusion, enter code 'Q' in column (f), and enter the excluded gain as a negative number in column (g). The net gain then flows to Schedule D.
Does the stock have to be bought directly from the company?
Yes. QSB stock must be acquired by the shareholder at original issue, in exchange for money or other property (not stock), or as compensation for services — not purchased from another shareholder.
Reviewed 2026-08-16. Programmes change — confirm current eligibility, amounts and deadlines on the official page before you apply. CapEasy is a private consultancy and is not affiliated with any government authority.