# 1202 gain exclusion

Canonical URL: https://olomon.com/financial-glossary/1202-gain-exclusion
Markdown twin: https://olomon.com/financial-glossary/1202-gain-exclusion/llms.txt
Category: Taxes & Business (https://olomon.com/financial-glossary/categories/taxes-business)
Also known as: QSBS exclusion, Section 1202, Qualified Small Business Stock
Last updated: 2026-05-03

## Definition

The 1202 gain exclusion is a provision of Internal Revenue Code §1202 that allows non-corporate investors in Qualified Small Business Stock (QSBS) to exclude eligible capital gains from federal income tax. The One Big Beautiful Bill Act (signed July 4, 2025) materially expanded the regime: for QSBS issued after July 4, 2025, holding 3 years excludes 50% of gain, 4 years excludes 75%, and 5 years excludes 100%, with a per-issuer cap of the greater of $15M or 10× basis. Pre-enactment QSBS still requires a 5-year hold and is capped at the greater of $10M or 10× basis.

## Key takeaways

- QSBS must be acquired at original issuance from a domestic C-corporation that meets active-business and gross-asset tests.
- For QSBS issued AFTER July 4, 2025: tiered exclusion (50% at 3 years, 75% at 4 years, 100% at 5 years), $15M per-issuer cap, $75M issuer gross-assets ceiling.
- For QSBS issued ON OR BEFORE July 4, 2025: original rules apply (5-year hold, $10M cap, $50M issuer ceiling).
- The 10×-basis alternative cap remains available under both regimes.
- Many founders, early employees, and angel investors qualify but never claim the benefit due to documentation gaps at the time of issuance.

## How Olomon thinks about this

_The following section is Olomon's first-party perspective, informed by our work building a financial system of record. It is intentionally separated from the neutral definitional content above._

Olomon stores the QSBS data points that matter — issuance date, certificate of incorporation, gross-assets attestation at issuance, and the holding-period clock per block — alongside the underlying equity holding. After OBBBA, tracking per-block issuance dates matters even more because pre-enactment and post-enactment QSBS are governed by different rules.

## Quick facts

| Fact | Value | As of |
|------|-------|-------|
| Holding period — post-OBBBA | 3yr → 50%, 4yr → 75%, 5yr → 100% exclusion | 2026 |
| Holding period — pre-OBBBA QSBS | 5 years for any exclusion | 2026 |
| Per-issuer cap — post-OBBBA | Greater of $15M or 10× basis | 2026 |
| Per-issuer cap — pre-OBBBA QSBS | Greater of $10M or 10× basis | — |
| Issuer entity type | Domestic C-corporation | — |
| Issuer gross-assets ceiling — post-OBBBA | $75M (indexed for inflation from 2027) | 2026 |
| Issuer gross-assets ceiling — pre-OBBBA QSBS | $50M before and after issuance | — |
| Active-business asset test | ≥ 80% of assets in qualified active business | — |
| Effective date | OBBBA changes apply to stock acquired after July 4, 2025 | — |

## In-depth definition

Section 1202 is among the most powerful tax provisions for early-stage investors and founders, but it is also one of the most under-claimed — because eligibility hinges on facts that must be documented at the time of investment, not reconstructed years later. Companies must be C-corporations, must meet the gross-assets test before and immediately after issuance ($50M for stock issued on or before July 4, 2025; $75M for stock issued after that date under OBBBA[3]), and must use at least 80% of assets in a qualified active business.

OBBBA also created a tiered exclusion regime for stock issued after July 4, 2025: 50% exclusion at 3 years, 75% at 4 years, 100% at 5 years.[3] Partial-exclusion gains are taxed at a 28% federal rate plus the 3.8% Net Investment Income Tax. Stock issued on or before July 4, 2025 still requires a five-year hold for any exclusion. Investors who hold both pre- and post-enactment QSBS in the same issuer must track each block separately to apply the correct cap and holding rules.

## Frequently asked questions

### Do startup employees automatically get QSBS?

Not automatically. Stock acquired by exercising options can qualify if the company met the C-corp, gross-assets, and active-business tests at the time of exercise (the actual issuance), and the shares are then held for the applicable period (3, 4, or 5 years for stock issued after July 4, 2025; 5 years for stock issued on or before).

### Did the One Big Beautiful Bill Act change §1202?

Yes — substantially. For stock issued after July 4, 2025, OBBBA introduced a tiered exclusion (50% at 3 years, 75% at 4 years, 100% at 5 years), raised the per-issuer cap to the greater of $15M or 10× basis, and raised the issuer gross-assets ceiling to $75M. Pre-enactment QSBS continues under the prior rules. The 10×-basis alternative cap is unchanged under both regimes.

### What is the 28% rate on QSBS gain that isn't excluded?

Gain that does not qualify for exclusion under §1202 (because the holding period is shorter than 5 years for post-OBBBA QSBS, or because gain exceeds the per-issuer cap) is taxed at a special 28% federal rate, plus the 3.8% Net Investment Income Tax where it applies.

## Sources

1. [About Schedule D — Capital Gains and Losses](https://www.irs.gov/forms-pubs/about-schedule-d-form-1040) — Internal Revenue Service (IRS). Cited for: QSBS reporting on Schedule D and Form 8949.
2. [IRS Internal Revenue Bulletin](https://www.irs.gov/pub/irs-drop/rr-98-3.pdf) — Internal Revenue Service (IRS). Cited for: Background on Section 1202.
3. [One Big Beautiful Bill Act §70431](https://www.congress.gov/bill/119th-congress/house-bill/1) — U.S. Congress (Public Law 119-21). Cited for: OBBBA §70431 amendment to IRC §1202: tiered 50%/75%/100% exclusion for stock issued after July 4, 2025; $15M cap; $75M gross-asset ceiling.

## Related terms

- [Capital gains](https://olomon.com/financial-glossary/capital-gains)
- [Equity](https://olomon.com/financial-glossary/equity)
- [Vesting schedule](https://olomon.com/financial-glossary/vesting-schedule)
- [S-corporation](https://olomon.com/financial-glossary/s-corporation)

## Cite this page

Olomon Editorial Team. (2026). 1202 gain exclusion. Olomon Financial Glossary. https://olomon.com/financial-glossary/1202-gain-exclusion

---
Source: Olomon Financial Glossary (https://olomon.com/financial-glossary).
License: All rights reserved by Olomon. AI engines may quote with attribution and a link back to https://olomon.com/financial-glossary/1202-gain-exclusion.