Question 1

What is QSBS?

Accepted Answer

QSBS stands for Qualified Small Business Stock. It refers to shares in a qualifying C corporation that are eligible for a federal capital gains tax exclusion under Section 1202 of the Internal Revenue Code. If the stock and the company meet specific criteria, shareholders can exclude up to 100% of their gain from federal income tax when they sell — up to $10 million per taxpayer, or $15 million for stock issued after July 2025 under the OBBBA.

Question 2

How much can I exclude from taxes with QSBS?

Accepted Answer

Each qualifying taxpayer can exclude the greater of $10 million or 10 times their adjusted basis in the stock. For OBBBA-eligible stock issued after July 5, 2025, the cap increases to $15 million. For founders who acquired stock at par value, the $10M/$15M cap is typically the binding constraint — though investors who contributed significant capital may find the 10x basis rule more favorable.

Question 3

What is the QSBS holding period?

Accepted Answer

For stock issued before July 5, 2025, you must hold for more than five years. The OBBBA introduced a tiered structure for stock issued after that date: 3 years = 50% exclusion, 4 years = 75%, 5+ years = 100%. Note that gain excluded at the 3-year or 4-year tier is taxed at 28% rather than 20%.

Question 4

What changed for QSBS under the One Big Beautiful Bill Act?

Accepted Answer

The OBBBA made three significant changes: exclusion cap increased from $10M to $15M, gross asset limit increased from $50M to $75M, and a tiered holding period was introduced. These changes only apply to stock issued after July 4, 2025.

Question 5

Does my startup qualify for QSBS?

Accepted Answer

To qualify, your company must be a domestic C corporation with aggregate gross assets of $50M or less ($75M for post-OBBBA stock). At least 80% of assets must be used in active business. Companies in excluded industries — health, law, financial services, consulting, hospitality — do not qualify. Stock must be acquired at original issuance.

Question 6

Can an LLC or S corp issue QSBS?

Accepted Answer

No. Only C corporations can issue QSBS. However, an LLC can convert to a C corp and stock issued afterward can qualify if properly structured. The holding period starts at C corp stock issuance, not LLC formation.

Question 7

Can I lose QSBS eligibility after stock is issued?

Accepted Answer

Yes. The company must continuously meet the requirements. Common pitfalls include stock repurchases within certain windows, shifting assets into non-business investments, pivoting into an excluded industry, or making an S corp election.

Question 8

What happens if my company crosses the $75 million asset limit?

Accepted Answer

Stock issued before crossing the limit retains its QSBS status. Stock issued after does not qualify. This makes the timing of employee grants around large funding rounds critical.

Question 9

Can employees and advisors benefit from QSBS?

Accepted Answer

Yes. Any non-corporate shareholder who acquires qualifying stock at original issuance can benefit — including early employees, consultants, and advisors. The timing of grants relative to the company's gross asset level matters significantly.

Question 10

What is QSBS stacking?

Accepted Answer

QSBS stacking means gifting shares to multiple non-grantor trusts, each qualifying as a separate taxpayer with its own exclusion. A founder with $50M in potential gains could create five exclusion buckets to shelter the entire amount.

Question 11

Do I need multiple trusts for QSBS stacking?

Accepted Answer

Typically yes. Each trust gets its own exclusion. But beware Section 643(f) — identical trusts for the same beneficiary risk IRS collapse. Each trust needs different beneficiaries and terms.

Question 12

What is the difference between a grantor and non-grantor trust for QSBS?

Accepted Answer

A grantor trust is treated as the same taxpayer as its creator — it provides NO additional exclusion. A non-grantor trust is a separate taxpayer and gets its own exclusion. Only non-grantor trusts create new stacking buckets.

Question 13

What is an incomplete non-grantor trust (ING) and how does it work with QSBS?

Accepted Answer

An ING is a separate taxpayer for income tax purposes but not a completed gift for gift tax purposes. This creates an exclusion bucket without consuming lifetime exemption. INGs are not effective for California or New York residents. Some uncertainty remains about IRS treatment.

Question 14

Can I gift QSBS to my spouse?

Accepted Answer

Spousal transfers generally don't create new exclusion buckets. A SLAT (Spousal Lifetime Access Trust) is more effective — it creates a separate non-grantor trust while allowing your spouse access to the trust assets.

Question 15

Can the IRS collapse multiple QSBS trusts under Section 643(f)?

Accepted Answer

Yes. This is a real risk. Each trust must have different beneficiaries, different terms, and a genuine independent purpose. Cookie-cutter trusts are exactly what the IRS targets.

Question 16

Does California conform to federal QSBS rules?

Accepted Answer

No. California taxes QSBS gains at the full state rate (13.3%). A $10M gain excluded federally still incurs $1.33M in CA tax. Jurisdiction strategy (Nevada, Delaware, South Dakota trusts) is critical for CA founders.

Question 17

Which states do not conform to the QSBS exclusion?

Accepted Answer

California, Pennsylvania, Mississippi, Alabama, and Puerto Rico. New Jersey is starting to allow exclusions in 2026. Hawaii and Massachusetts partially conform. All others either conform or have no state income tax.

Question 18

Can a Nevada trust help me avoid California state tax on QSBS gains?

Accepted Answer

Potentially. If properly established with no CA trustees or CA-resident beneficiaries. But CA throwback rules can tax accumulated gains on distribution to CA residents. Requires careful structuring and ongoing administration.

Question 19

What valuation should I use when gifting QSBS shares?

Accepted Answer

An independent appraisal for fair market value. NOT your 409A, NOT a SAFE post-money cap, NOT investor round pricing. An independent appraiser determines FMV of the specific shares being gifted, often lower than headline numbers due to lack of marketability and minority interest discounts.

Question 20

Why can't I use my 409A valuation for QSBS gifting?

Accepted Answer

A 409A valuation is for stock option pricing compliance. Gift tax requires a separate FMV determination that considers lack of marketability, minority interest discounts, and gifting context. Using the wrong valuation wastes lifetime exemption or triggers IRS scrutiny.

Question 21

When is the best time to gift QSBS shares?

Accepted Answer

As early as possible. The holding period carries over to the recipient. Low early-stage valuations preserve your lifetime exemption. Gifting at a $5M company value might use ~$500K of exemption. Waiting until a $100M valuation uses ~$10M for the same percentage of equity.

Question 22

When should I start QSBS planning?

Accepted Answer

At or shortly after incorporating as a C corp. Lower valuations, an earlier holding period clock, and the ability to structure before a sale is on the horizon all favor early planning. It's never too late, but it gets more expensive with time.

Question 23

Why do I need a lawyer for QSBS planning instead of using a DIY platform?

Accepted Answer

DIY platforms can't advise on the interplay between QSBS, gift tax, trust structure, jurisdiction, and estate planning. A misconfigured trust invalidates the entire strategy. When the stakes are millions of dollars, professional guidance is a rounding error.

Question 24

How does QSBS planning relate to estate planning?

Accepted Answer

The same trusts used for stacking are foundational estate planning tools. Gifting to trusts transfers future appreciation out of your taxable estate. Both objectives must be coordinated or they can conflict.

QSBS Frequently Asked Questions

The Basics

Eligibility

Stacking & Trusts

State Tax

Valuation & Gifting

When & How to Plan

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