Section 1202
Also: IRC 1202, Section 1202, 1202 exclusion, QSBS exclusion
The IRC provision that creates the capital gains exclusion for Qualified Small Business Stock. Allows 100% federal exclusion on stock acquired after September 27, 2010 and held more than five years.
Section 1202 defines the rules that let non-corporate shareholders exclude federal tax on the sale of QSBS. For stock acquired after September 27, 2010 and held more than five years, the exclusion is 100%. Earlier acquisition windows have 50% or 75% exclusion, with the remaining gain taxed at a 28% capital gains rate and partially added back for AMT.
Example: an engineer acquires QSBS-qualifying shares in 2015 for $20,000. Selling in 2025 for $5 million produces a $4.98 million gain. Under the 100% rule, the entire gain is excluded from federal income tax. The AMT preference that applied to pre-2010 QSBS does not apply to post-2010 QSBS.
Common mistake: failing to document the company’s gross assets at the time of stock issuance. The $50 million cap is tested at issuance only, not continuously, but the burden of proof at audit sits with the taxpayer. Request a company QSBS attestation letter and keep it with the share purchase records.
Section 1202 matters at the moment of stock acquisition, across the five-year holding window, and at planning for exit. Coordinate with Section 1045 if an early sale is forced.
Articles referencing Section 1202
- Founder Equity: 83(b) Elections, QSBS, and Early Exercise
The three moves every founder should make in the first 30 days after incorporation, plus the common mistakes that permanently destroy future tax savings.
- QSBS and Section 1202: The $10M Federal Exclusion Every Founder Should Know
How the qualified small business stock rules work, who qualifies, how to stack the exclusion across trusts, and what blows up the eligibility.