If you're a founder or early investor planning to sell your C corporation stake, there's a powerful tax provision you need to know about: IRS Section 1202.
What Is It?
Section 1202, also known as the Qualified Small Business Stock (QSBS) exclusion, allows eligible shareholders to exclude up to 100% of capital gains from federal taxation when selling qualifying stock.
The Numbers Are Significant
- Exclude up to $10 million in gains (or $15 million for stock acquired after July 4, 2025)
- Or exclude 10x your initial investment, whichever is greater
- Avoid up to 23.8% in federal capital gains tax (20% rate + 3.8% NIIT)
Example: On a $10 million gain, this could mean $2.38 million in tax savings.
Do You Qualify?
You might benefit from Section 1202 if:
✓ You own stock in a U.S. C corporation
✓ The company had under $50 million in assets when you acquired your shares
✓ You received your stock directly from the company (not purchased from another shareholder)
✓ The business operates in a qualifying industry (excludes most service businesses like consulting, law, finance, hospitality)
✓ You've held (or will hold) the stock for at least 5 years
Should You Look Into This?
You should absolutely explore Section 1202 if:
- You're planning a sale or exit in the next 1-3 years and your holding period will exceed 5 years
- You founded or joined a startup as an early investor/employee
- Your company is structured as a C corporation (or could convert to one)
- Your potential gains could be substantial
Important Timing Considerations
- The 5-year holding period is critical—plan ahead
- Stock acquired after September 27, 2010 qualifies for the full 100% exclusion
- Converting from an LLC/S-corp to a C-corp? The clock starts at conversion
Next Steps
Section 1202 is complex, and not every situation qualifies. However, the potential savings make it worth investigating early in your exit planning process.
We recommend:
- Review your stock acquisition dates and company structure
- Consult with a tax advisor experienced in QSBS planning
- Don't wait until the sale is imminent—advance planning is essential
This information is for educational purposes only and does not constitute tax advice. Please consult with a qualified tax professional regarding your specific situation.
Questions? Schedule a consultation to discuss whether Section 1202 could benefit your exit strategy.
