Section 1202 QSBS: 100% Capital Gains Exclusion, 5-Year Holding Period & Gross Asset Ceiling
A tax and legal guide to Internal Revenue Code Section 1202 Qualified Small Business Stock (QSBS), $10M gain exclusions, and trust packing strategies.
QSBS Eligibility & Tax Exclusion Modeler
Evaluate 5-year holding periods, $50M gross asset limits, and Section 1045 rollovers
Empirical Analysis & Findings
## Section 1202 QSBS: Federal Capital Gains Exclusion
Internal Revenue Code Section 1202 allows non-corporate taxpayers to eliminate federal capital gains tax on the sale of Qualified Small Business Stock (QSBS) held for more than 5 years.
### 1. Mandatory Qualification Criteria
To qualify for 100% tax exclusion:
1. **Domestic C-Corporation**: LLCs and S-Corps are ineligible unless converted prior to stock issuance.
2. **Original Issuance**: Stock must be acquired directly from the corporation for money, property, or services (not secondary transfers).
3. **$50 Million Gross Asset Ceiling**: Cash plus aggregate adjusted basis of property held cannot exceed $50M before or immediately after issuance.
4. **Active Business Requirement (80% Test)**: At least 80% of assets must be used in active conduct of qualifying trades (excludes finance, professional services, hospitality, and mining).
5. **5-Year Holding Period**: Minimum 5 consecutive years from original issuance date.
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Frequently Asked Questions
What is the maximum tax-free capital gain exclusion under Section 1202 QSBS?
Investors and founders can exclude 100% of federal capital gains up to the greater of $10,000,000 or 10 times the adjusted basis of qualifying stock issued.
What is the aggregate gross assets ceiling for QSBS eligibility at issuance?
The issuing corporation must have aggregate gross assets of $50,000,000 or less at all times before and immediately after the issuance of the stock.
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