The best kept secret of QSBS

Updated: May 15, 2025

Qualified Small Business Stock (QSBS) has been a powerful tool since it was introduced under Section 1202 of the Internal Revenue Code. But even in 2025, its full potential might not fully be understood.

What is QSBS?

QSBS refers to shares of stock issued by a C corporation that meets certain criteria outlined in Section 1202. When structured correctly, gains from the sale of QSBS can be excluded from federal capital gains taxes up to 100%, subject to limits.

To qualify, the stock must be acquired directly from the company, not purchased in a secondary transaction. The issuing company must be a domestic C corporation with gross assets not exceeding $50 million at the time of stock issuance. The business must also be actively engaged in a qualifying trade or business, excluding industries like financial services, law, and consulting. Lastly, the investor must hold the shares for at least five years to take advantage of the exclusion.

If these conditions are met, investors may be able to exclude the greater of $10 million or 10x of their original investment from federal capital gains taxes.

Why is QSBS still relevant in 2025?

While QSBS has been part of broader tax reform discussions, the exclusion remains available under current law in 2025. That said, it’s important to stay alert: proposed tax reforms have occasionally targeted Section 1202 benefits, especially as part of broader capital gains policy debates.

In terms of guidance, the IRS continues to keep QSBS on its “no-rule” list, meaning they won’t issue private rulings on certain aspects, particularly around the “active business” requirement. This creates added complexity and makes it even more important to seek expert tax advice. Additionally, the treatment of QSBS at the state level varies. While federal benefits remain strong, states like California and New Jersey do not conform to QSBS rules, meaning gains may still be taxed locally.

At the same time, people are becoming more QSBS-aware. Many GPs, legal counsel, and tax advisors now incorporate QSBS planning into early-stage structuring, and more founders are beginning to understand its long-term wealth implications.

‍Why QSBS is sometimes overlooked

QSBS is sometimes underutilized, not because it’s ineffective, but because it’s misunderstood. Founders and employees may not realize their shares qualify. Investors may lack documentation from early rounds. Even experienced VCs may not consistently track QSBS eligibility across a growing portfolio.

Adding to the challenge, QSBS eligibility depends on multiple factors (i.e. corporate structure, timing, business activity, and holding period) meaning one misstep can invalidate the benefit. Without proactive tracking and communication, potential tax savings can slip through the cracks.

That’s where platforms like Aumni can have a big impact. Our platform was designed to bring clarity and intelligence to complex venture capital data. As part of that, we help uncover QSBS eligibility automatically by pulling directly from deal documents, formation data, and cap table records.

This means fund managers can identify untapped tax advantages across their portfolios, founders and employees can gain visibility into the long-term benefits of their equity, and legal or financial advisors can provide better guidance based on reliable, structured data.

QSBS is one of the most overlooked tools in early-stage venture. But with better tracking and better data, it doesn’t have to be. See how Aumni supports QSBS planning by connecting with our team today.

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