Section 1202 QSBS in 2026: Issuance Date Now Changes the Holding-Period and Exclusion Rules

IRC §1202 may allow a noncorporate taxpayer to exclude part or all of the gain from qualifying small business stock. The 2025 legislation created different rules for stock acquired after July 4, 2025, so the issuance and acquisition dates are now central to every analysis.

Core QSBS Requirements

The stock generally must be original-issue stock of a domestic C corporation acquired in exchange for money, property other than stock, or services. The corporation must satisfy the applicable aggregate-gross-assets test before and immediately after issuance and must use at least the required portion of its assets in one or more qualified trades or businesses during substantially all of the shareholder's holding period.

Excluded businesses include many health, law, engineering, architecture, accounting, actuarial, performing-arts, consulting, athletics, financial-services, brokerage, banking, insurance, financing, leasing, investing, farming, extraction, hotel, motel, and restaurant activities. The statutory definitions and the corporation's actual operations control.

Stock Acquired on or Before July 4, 2025

Earlier stock generally follows the traditional more-than-five-year holding requirement. The historical aggregate-gross-assets ceiling is $50 million, and the per-issuer gain limitation generally uses the greater of $10 million, reduced by prior eligible gain from that issuer, or 10 times the taxpayer's adjusted basis in qualifying stock sold during the year.

The exclusion percentage also depends on the original acquisition date because stock acquired in earlier statutory periods may qualify for a 50%, 75%, or 100% exclusion.

Stock Acquired After July 4, 2025

For qualifying stock acquired after July 4, 2025, current law generally provides a 50% exclusion after three years, a 75% exclusion after four years, and a 100% exclusion after five years. The corporation's aggregate-gross-assets ceiling is generally increased to $75 million, subject to future inflation adjustments under the statute.

The dollar component of the per-issuer limitation is generally increased to $15 million for post-July 4, 2025 stock, also subject to statutory inflation adjustment, while the alternative 10-times-basis limitation remains relevant. Prior exclusions from the same issuer must be considered.

Formation and Conversion Decisions Matter

An LLC interest is not QSBS. An LLC that later converts to a C corporation may issue stock that begins a potential QSBS holding period at the conversion or issuance date if the statutory requirements are satisfied. The earlier LLC holding period generally does not simply become a QSBS holding period.

An S corporation is not a qualified small business for Section 1202 purposes. Redemptions near an issuance, transfers, reorganizations, contributions of property, option exercises, and later changes in business activity can also affect eligibility or holding period.

The Corporation Must Continue to Qualify

QSBS is not determined only on the issuance date. The active-business requirement generally must be satisfied during substantially all of the shareholder's holding period. Excess portfolio assets, nonqualified activities, redemptions, or other corporate changes can jeopardize the exclusion.

Early Sales and Section 1045

A noncorporate taxpayer selling qualifying stock after holding it for more than six months but before the applicable Section 1202 holding period may be able to defer gain under Section 1045 by timely purchasing replacement QSBS. The rollover rules, replacement period, and basis adjustments require separate analysis.

Documentation Should Begin at Issuance

The shareholder and corporation should retain capitalization records, stock-purchase or service agreements, valuation and gross-asset support, tax returns, business-activity records, redemption history, and documents supporting original issuance and holding period. Reconstructing these facts during a sale can be difficult.

Section 1202 is highly technical, and state conformity varies. This information addresses federal law for educational purposes and is not a substitute for transaction-specific tax and legal advice.