You Make the Call - April 2, 2026

Question: In 2017, Maria invested $200,000 in a startup technology company organized as a C corporation. At the time the stock was issued, the company had $8 million in total gross assets. Maria purchased the stock directly from the corporation in exchange for cash. The business meets the active business requirement and is not in a prohibited service industry. Maria held the stock for more than five years. In 2026, Maria sold all her shares for $3 million, resulting in a $2.8 million capital gain. Is Maria eligible to exclude any of the gain from income under §1202? 

Answer: Yes. Maria can exclude the entire $2.8 million gain under the QSBS rules. Maria’s $2.8 million gain is also below the applicable §1202 limitation, generally the greater of $10 million or 10 times her basis for stock acquired on or before the July 4, 2025, law change.

To qualify for the §1202 QSBS exclusion, the following requirements must be met: 

1. The stock must be issued by a domestic C corporation. 
   Maria purchased stock issued by an entity organized as a domestic C corporation, meeting this requirement. 
2. The stock must be acquired directly from the corporation. 
   Maria purchased the stock directly from the company for cash rather than from another shareholder, thereby satisfying the original issuance requirement. 
3. The corporation must be a qualified small business when the stock is issued. 
   When Maria acquired her stock in 2017, the gross assets test under §1202 required that the corporation’s aggregate gross assets not exceed $50 million before and immediately after the stock issuance. The corporation had $8 million in assets, so this requirement was met. Although the One Big Beautiful Bill Act (OBBBA) later increased the threshold to $75 million, that change applies only to stock issued after July 4, 2025. 
4. The business must meet the active business requirements. 
   During substantially all of Maria’s holding period, at least 80% of the corporation’s assets must be used in the active conduct of one or more qualified trades or businesses, and certain service businesses are excluded. The startup meets this requirement and is not in a prohibited industry, such as health, engineering or law, as defined in §1202(e)(3). 
5. The stock must be held for more than five years for the 100% exclusion. 
   Maria held the stock from 2017 to 2026, exceeding the five-year holding period. 

Note: OBBBA added additional tiers to the exclusion for stock acquired after July 4, 2025. If Maria had acquired the stock after that date and held it for three years, she could exclude 50%; if she held it for four years, she could exclude 75%. Because Maria acquired her stock in 2017, these new tiers do not apply.