Sell Your Business and Pay $0 in Capital Gains

If you’re building a company you eventually hope to sell, there’s a provision in the tax code that could be worth millions of dollars to you — and most business owners have never heard of it.

It’s called Qualified Small Business Stock, or QSBS, and in the right circumstances, it lets you exclude a large portion — sometimes all — of the capital gains tax when you sell stock in your company. Recent tax law changes also made this benefit significantly more generous and more flexible than it used to be. Here’s what you actually need to know.

The basic idea.

Normally, when you sell stock in your business for a profit, you owe capital gains tax on that profit — often 20% or more at the federal level, plus state tax on top of that. QSBS, created under a part of the tax code called Section 1202, carves out a major exception: if your company and your stock meet certain requirements, you can exclude a large chunk of that gain from your taxable income entirely.

For a founder selling a company for several million dollars, this isn’t a minor deduction. It can be the difference between owing a seven-figure tax bill and owing nothing.

How much can you actually exclude?

This is where recent changes matter. Under the One Big Beautiful Bill Act (OBBBA), the rules got meaningfully better for stock issued after July 4, 2025:

• The maximum exclusion increased from $10 million to $15 million per company (or 10 times what you originally invested, whichever is larger) — and this amount will adjust upward for inflation starting in 2027.
• The holding period requirement became more flexible. Previously, you had to hold the stock for a full five years to get any benefit — an all-or-nothing rule. Now, there’s a sliding scale:
• Hold for 3 years → exclude 50% of your gain
• Hold for 4 years → exclude 75% of your gain
• Hold for 5+ years → exclude 100% of your gain

If your stock was issued before July 4, 2025, the older rules still apply: a $10 million cap and a strict five-year, all-or-nothing holding period.

Which companies actually qualify?

1. Your business has to be a C-corporation. This is a hard requirement. LLCs, partnerships, and S-corps generally can’t issue QSBS unless they’re structured as a C-corp when the stock is issued. If you’re currently an LLC or S-corp and you’re planning to grow and eventually sell, this is worth a real conversation about entity structure well before you’re close to a sale.
2. The company can’t be too large when the stock is issued. The company’s total assets generally need to be under $75 million (up from $50 million under the old rules) at the time your stock was issued. This is a one-time test — once your stock qualifies at issuance, the company growing beyond that threshold later doesn’t disqualify your existing shares.
3. You generally need to get the stock directly from the company — not buy it secondhand from another shareholder. This usually means stock received as a founder, through an investment round, or as compensation for services.
4. The business has to be an “active” business, not just holding assets. At least 80% of the company’s assets need to be used in actively running the business.
5. Certain industries don’t qualify. This is important: QSBS specifically excludes professional service businesses — things like law, accounting, consulting, financial services, health care, and businesses where the main asset is really just the skill or reputation of the people working there. It also excludes hotels, restaurants, banking, and a few other categories. This rule tends to favor product-based and technology-based businesses over service-based ones.

A few traps worth knowing about.

• Buybacks can disqualify stock. If your company repurchases stock from you or a related party in the years surrounding when new shares are issued, it can jeopardize QSBS treatment on those new shares. This is a technical area where the timing matters, so any stock buyback plans should be reviewed with this in mind.
• Gifting or inheriting QSBS can preserve the benefit — sometimes making it better. If you give qualifying stock to a family member or it passes through your estate, the recipient generally keeps the QSBS treatment and your original holding period. In some cases, gifting shares to a separate trust or to family members can actually create additional $15 million exclusions, since the limit generally applies per taxpayer.
• If you sell too early, there may be a fallback option. If you haven’t hit the full five-year holding period yet, a provision called a Section 1045 rollover may let you defer the gain by reinvesting the proceeds into another qualifying small business within 60 days — essentially restarting the clock rather than losing the benefit entirely.

Why this matters now, even if a sale feels far away.

The single biggest mistake with QSBS is realizing it existed after you’ve already sold your company. Whether your stock qualifies at all comes down to decisions made at formation and at each funding round — your entity type, your asset levels when shares are issued, and clean documentation along the way. This isn’t something you can retroactively fix after a sale is already in motion.

If you’re currently running your business as an LLC or S-corp with real growth and exit potential, or you’re a C-corp founder who’s never had this reviewed, click Book A Meeting.

FAQ: What is Qualified Small Business Stock (QSBS)

1. What is Qualified Small Business Stock (QSBS)?

QSBS is a provision of the tax code, Section 1202, that lets you exclude a large portion of your capital gain, sometimes all of it, when you sell stock in a qualifying company. Normally, selling stock at a profit triggers federal capital gains tax of often 20% or more, plus state tax. For a founder selling a company for several million dollars, QSBS can be the difference between a seven-figure tax bill and owing nothing.

2. How much gain can I exclude?

For stock issued after July 4, 2025, the One Big Beautiful Bill Act (OBBBA) raised the maximum exclusion from $10 million to $15 million per company, or 10 times what you originally invested, whichever is larger. The $15 million amount adjusts for inflation starting in 2027. Stock issued before July 4, 2025 still follows the older rules, which cap the exclusion at $10 million.

3. How long do I have to hold the stock?

For stock issued after July 4, 2025, there’s now a sliding scale. Holding for 3 years excludes 50% of your gain, 4 years excludes 75%, and 5 or more years excludes 100%. Under the older rules, you had to hold the stock a full five years to get any benefit, with no partial credit. Stock issued before July 4, 2025 still follows that all-or-nothing rule.

4. What requirements does my company have to meet?

Four requirements apply:

1. The business must be a C-corporation.
2. Its total assets generally must be under $75 million (up from $50 million under the old rules) when your stock is issued. This is a one-time test, so the company growing past $75 million later doesn’t disqualify shares that already qualified.
3. You generally must receive the stock directly from the company, such as a founder’s shares, an investment round, or compensation for services. Buying it secondhand from another shareholder usually doesn’t count.
4. The company must be an active business, with at least 80% of its assets used in actively running the business.

5. Can my LLC or S corporation qualify?

Generally not unless it’s structured as a C-corporation when the stock is issued. LLCs, partnerships, and S corporations usually can’t issue QSBS. If you’re running an LLC or S corporation with real growth and exit potential, it’s worth discussing entity structure well before a sale is close. QSBS eligibility is decided at formation and at each funding round, so it generally can’t be fixed after a sale is already in motion.

6. Which industries don’t qualify?

QSBS excludes professional service businesses, such as law, accounting, consulting, financial services, and health care, and businesses where the main asset is the skill or reputation of the people working there. It also excludes hotels, restaurants, banking, and a few other categories. The rules tend to favor product-based and technology-based businesses over service-based ones.

7. What can disqualify my stock, and what if I sell early?

Stock buybacks are a common trap. If your company repurchases stock from you or a related party in the years surrounding the issuance of new shares, it can jeopardize QSBS treatment on those new shares, so buyback plans should be reviewed with this in mind. If you sell before the holding period you need, a Section 1045 rollover may let you defer the gain by reinvesting the proceeds into another qualifying small business within 60 days. That essentially restarts the clock rather than losing the benefit entirely.

8. Can I gift or inherit QSBS without losing the benefit?

Often yes. If you give qualifying stock to a family member or it passes through your estate, the recipient generally keeps the QSBS treatment and your original holding period. In some cases, gifting shares to family members or to a separate trust can create additional $15 million exclusions, since the limit generally applies per taxpayer. Gifting rules are technical, so run any plan past your CPA or attorney first.