Do My Startup Shares Qualify for 0% Capital Gains Tax Under Qualified Small Business Stock (QSBS) Law?

Q: Can I roll over QSBS gains if I sell before 5 years?

Yes. Section 1045 of the tax code allows you to defer the gain by rolling the proceeds into another QSBS-eligible stock within 60 days of the sale. This can be a strategy if you leave a company early, but it can be complicated and risky.

Q: What is "QSBS stacking"?

QSBS stacking is an advanced strategy where you gift shares to multiple irrevocable trusts. Because the $15 million gain exclusion is per taxpayer, creating new taxpayers in the form of trusts allows you to “stack” multiple exclusions, potentially shielding far more than $15 million from taxes.

Marcel Miu, CFA, CFP
Sep 18
6 min read

TL;DR

Yes, your startup shares could qualify for a 0% federal capital gains tax on gains up to $15 million or 10 times your cost basis. This benefit falls under the Qualified Small Business Stock (QSBS) rules. To qualify, you must own stock (i.e., exercise your stock options) directly from a U.S. C-Corporation with less than $75 million in gross assets at the time of issue, hold it for over five years (for the full exclusion), and the company must operate in an eligible industry like technology or manufacturing.

An Unexpected Windfall: The $700,000 Tax Bill That Vanished

Let's talk about Alex. Alex worked at a startup and exercised 75,000 stock options over the years. When the company had a major exit, Alex's stake was worth a cool $2 million. It was the moment every startup employee dreams of.

Then reality hit.

The potential federal tax bill was nearly $700,000, a staggering amount that would take a huge bite out of this life-changing windfall. But Alex had unknowingly met a series of specific requirements. A little-known part of the tax code called Section 1202, also known as the QSBS rule, came into play. That massive tax bill disappeared.

Paying zero capital gains tax on your equity gains isn’t a myth.

This post will walk you through how to determine if your shares qualify for this same benefit. We will cover the steps needed to secure this powerful tax advantage. You can also explore our webinar on QSBS for a more detailed discussion.

How Do I Know If My Shares Qualify?

You must meet a 5-point test. Your shares meet the requirements only if the company is a qualified business with assets under a specific cap when you exercise your options/are granted stock. You also must hold the actual stock, not just the options, for five years (for the full exclusion).

The rules are strict, but getting 0% tax rate from the government will require jumping through hoops. Missing even one step can mean losing the entire tax benefit. This visual breaks down the journey from qualification to tax-free gains.

An infographic showing the 5-point test for QSBS tax benefits, detailing the path from qualified business to tax-free gains and emphasizing that the 5-year clock starts at exercise, not grant.

Is the Company a "Qualified Business"?

Your company's main revenue must come from a qualified trade or business, like technology, manufacturing, or retail.

It must be an active U.S. C-Corporation. Service-based businesses like financial services, hospitality, farming, and consulting are generally not eligible. The table here provides a clear breakdown.

A table outlining the requirements for a company to be QSBS-eligible, covering corporate structure (C-Corp), asset caps ($50M/$75M), eligible industries, and the 80% business activity rule.

Did the Company Meet the Asset Test When I Got My Stock?

The rules have become more generous as of July 2025. For "Legacy" shares issued before the new law, the company's gross assets must have been below $50 million. For shares issued after the new law, the cap is a more generous $75 million, indexed to inflation.

This test applies immediately before and after you receive your stock, meaning if you acquired your shares via stock options, on your exercise date. Also, a company's valuation is not the same as its gross assets. A company with a high valuation could still have qualifying book assets, as shown below. New cash from a funding round counts, so the timing of your exercise is critical.

A comparative graphic showing the changes from Legacy QSBS to OBBBA QSBS, highlighting the increased asset cap to $75M, the new partial benefit for a 3-year hold, and the larger $15M gain exclusion.

An explanatory graphic illustrating that a company's high valuation does not disqualify it from QSBS, as the IRS asset test counts book assets like cash and equipment, not investor mark-ups or goodwill.

Do I Own Stock or Just Options?

You must own the stock directly!! The 5-year holding period for QSBS does not start until you exercise your stock options and officially own the shares.

Waiting too long to exercise can be a costly mistake. The financial difference between exercising early to qualify for QSBS versus waiting for a liquidity event can be staggering. It could potentially save you hundreds of thousands in taxes.

A chart comparing two scenarios for exercising 75,000 stock options, showing that exercising early to qualify for QSBS can result in $0 federal tax, a potential tax savings of approximately $700,000.

What Happens If My Company Is Acquired Before 5 Years?

You do not necessarily lose the benefit, but it depends on the deal structure. In a stock-for-stock acquisition with another QSBS-qualified company, your holding period and QSBS status can "tack on." In a cash-out deal, you could potentially lose the benefit unless you execute a 1045 rollover.

The pros and cons of each deal type are significant, as outlined in the table. In the case of a stock-for-stock acquisition, if the acquirer is not QSBS-eligible, your tax-free gain is frozen at its value on the merger day. Any future growth is taxable. The new rules add another layer of complexity for partial holds.

A table explaining the outcomes for QSBS stock in different acquisition scenarios (All Cash, Stock-for-Stock, Mixed), detailing the pros and cons for tax treatment before the 5-year hold is met.

A chart providing a numerical example of what happens when QSBS stock is acquired by a non-QSBS company after 3 years, showing how the tax-free gain is frozen at the merger-day value.

How Do I Prove My Shares are QSBS-Eligible?

Documentation is your best defense against an IRS audit. You need to create a "QSBS Vault" with specific records from the time of exercise through the eventual sale.

The burden of proof is on you, the taxpayer. And when you claim a 0% tax rate on a windfall, there will be plenty of eyes on you. Without the appropriate records, the IRS can deny your claim. The framework here shows exactly what you need to keep. The best way to solidify your claim is to have your company's finance or legal team complete an attestation checklist, like the template linked below, before you acquire your shares.

A table outlining the essential documents for a QSBS Vault, including eligibility proof, exercise records, and tax forms, explaining why each is critical for defending a QSBS claim in an IRS audit.

Attestation Checklist to send to CFO / Head of Finance / Legal: Click here

FAQs

What is the difference between Legacy and new QSBS rules?

The new law increased the asset cap from $50 million to a $75 million inflation-adjusted cap. It also raised the gain exclusion cap to $15 million and allows for partial benefits after three and four-year holds. Legacy shares require a full five-year hold.

Can I roll over QSBS gains if I sell before 5 years?

Yes, Section 1045 of the tax code allows you to defer the gain by rolling the proceeds into another QSBS-eligible stock within 60 days of the sale. This is a strategy if you leave a company early, but beware, it can be complicated and risky.

What is "QSBS stacking"?

This is an advanced strategy where you gift shares to multiple irrevocable trusts. Since the $15 million gain exclusion is per taxpayer, creating new taxpayers in the form of trusts allows you to "stack" multiple exclusions. This can potentially shield far more than $15 million from taxes.

What states do not conform to federal QSBS rules?

Be aware of state taxes. California, Pennsylvania, and New Jersey do not follow the federal QSBS exclusion and will tax your gains at state income tax rates (still exempt from federal taxes).

Your Next Steps

Here is how to take action and determine your QSBS strategy.

Take the Gut Check. First, ask yourself if the risk and illiquidity are worth it. Can you afford the cash to exercise and potentially pay Alternative Minimum Tax (AMT)? Can you lock up this money for 3-5 years? The answers to these questions will guide your path.

A 3-question checklist to help individuals decide if pursuing a QSBS strategy is right for them, focusing on risk tolerance, liquidity needs, and the impact of the tax savings on their financial goals.

Verify Eligibility with Your Company. Do not guess. Send a formal questionnaire to your company's CFO, controller, or legal department. Getting a signed attestation letter is the gold standard for proving eligibility.

Attestation Checklist to send to CFO / Head of Finance / Legal: Click here

Create Your QSBS Vault. Organize your documents now. Use a file-retention framework to save every key document, from your exercise confirmation and 83(b) election receipt to the company's 409A valuation. This will be your best defense in an audit.
Model Your Exercise Strategy. The timing of your exercise is the most critical decision you will make. Exercising early, when the strike price is low and the company is safely under the asset cap, is key. This often involves a trade-off between cash outlay now versus a massive tax benefit later.

Don't Leave Millions on the Table

Navigating QSBS rules is complex, but the payoff can be life-changing. It could accelerate goals like early retirement or a dream home by eliminating a huge tax bill. The key is proactive planning. This means verifying eligibility, documenting everything, and strategically timing your stock option exercise.

If you hold equity in a startup that might be QSBS-eligible, the stakes are too high to guess. Let's build a clear strategy together. Schedule a consultation to model your potential tax savings and create your QSBS action plan.

This blog is for educational purposes only and should not be taken as individual advice

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Marcel Miu, CFA and CFP is the Founder and Lead Wealth Planner at Simplify Wealth Planning. Simplify Wealth Planning is dedicated to helping tech professionals master their money and achieve their financial goals.

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