Section 1202 of the Internal Revenue Code is one of the most powerful tax breaks in the US tax code, and one of the least known. If your startup stock qualifies as QSBS and you hold it for 5+ years, you can exclude up to $10M of capital gains from federal tax.
Qualifying requirements
- The company must be a domestic C-corporation.
- Aggregate gross assets at issuance must be ≤$50M.
- Stock must be acquired at original issuance (directly from the company, not on the secondary market).
- You must hold the stock for at least 5 years.
- The company's primary business must be 'qualified' (most tech qualifies; some service businesses don't).
How big is the exclusion?
The greater of $10M or 10× your basis. If you exercised options at $50K basis, your exclusion cap is $500K. If you exercised at $1M basis, the cap is the full $10M.
Per-issuer, per-taxpayer
The $10M cap applies per company. If you hold QSBS in three different startups and exit each for $10M, you can exclude up to $30M total. Married couples filing jointly each get their own $10M cap on the same stock if held jointly — effectively a $20M household exclusion.
Before you exercise, ask the company for a QSBS letter — a written confirmation that the stock qualified under Section 1202 at the time of issuance. Most pre-IPO companies will provide this on request.