Qualified Small Business Stock (QSBS)

Stock in a qualifying domestic C-corporation, acquired at original issuance and held for a required period, that can allow a large share of the eventual gain to be excluded from U.S. federal capital gains tax under Internal Revenue Code Section 1202.

Example

Original-issue stock bought for 50,000 and sold years later for 3,000,000, with every eligibility requirement met, can have some or all of the 2,950,000 gain excluded from federal capital gains tax.

Important

Several eligibility requirements - the entity type and the original-issuance status among them - can only be satisfied from the moment the stock is first issued, not arranged afterward. The specific caps and holding periods are set by law and have changed more than once.

Related terms

• Capital gain — The profit made by selling an asset for more than it cost, as distinct from the income the asset paid you while you held it.
• Cost basis — What an investment actually cost you: the purchase price plus every fee, tax and expense required to acquire it and make it usable.
• Taxable event — The moment a tax system treats something as having happened - most commonly a sale, rather than an increase in value while you still hold the asset.

Lessons that explain it

• A loss here does not wait for a rebound, because there usually is not one — Most positions fail outright and stay failed - there is no price to watch and no recovery to wait for. What survives is a genuine tax provision that can exclude the entire gain on a winner, and an equally genuine cost most investors never total: their own uncompensated diligence time. (13 min)

All 578 terms in the Investing glossary