Section 1202 QSBS Checklist

A practical checklist for founders, early employees, and investors approaching a liquidity event — covering the 8 qualification tests, holder-type steps, pre-transaction timing, documentation, and state conformity. Updated for 2026 and the One Big Beautiful Bill Act (OBBBA).

How to use this checklist

QSBS planning has three distinct time windows: at issuance, during the holding period, and before a transaction. Missing a step in the first two windows often cannot be corrected in the third. Work through each section in order. Items marked required are qualification tests you must pass. Items marked timing are actions with hard deadlines. Items marked document are records to gather or verify.

Use the QSBS Exclusion Calculator alongside this checklist to model your estimated exclusion. Use the full qualification requirements guide for a deeper analysis of any individual test.

Part 1: The eight qualification tests required

All eight must pass independently. Tests 1–3 and 6–7 are assessed primarily at issuance. Tests 4–5 run throughout the holding period. Test 8 is assessed at the time of sale. One failure disqualifies the entire lot from the exclusion.¹

#	Test	Pre-OBBBA (stock issued on or before July 4, 2025)	Post-OBBBA (stock issued after July 4, 2025)
1	C corporation — issuing entity is a domestic C corporation at issuance	Same rule under both regimes. S corps, LLCs taxed as partnerships, and foreign corporations cannot be the issuer. An LLC that filed Form 8832 to be taxed as a C corp can qualify. An S corp conversion to C corp means only shares issued after the conversion date count.
2	Post-1993 issuance — stock issued after August 10, 1993	Same rule under both regimes. All modern startup stock qualifies on this test.
3	Gross assets — company aggregate gross assets at and immediately after issuance did not exceed the threshold	≤ $50M at issuance	≤ $75M at issuance; threshold indexed for inflation after 2026²
4	Active business — at least 80% of company assets used in a qualified trade or business during substantially all of the holding period	Same rule under both regimes. Tested throughout the holding period — a pivot into an excluded industry after issuance can fail this test.
5	Qualified trade or business — company does not operate in an excluded industry under §1202(e)(3)	Same rule under both regimes. Excluded: health, law, engineering, architecture, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage, banking/investing, farming, mineral extraction, hotel/restaurant. See the excluded industries guide for borderline analysis.
6	Original issuance — shares acquired directly from the corporation, not in a secondary transaction	Same rule under both regimes. Secondary-market purchases from existing holders do not qualify. SAFE or convertible note conversions qualify as original issuance if the note itself was originally issued by the corporation.
7	Eligible shareholder — holder is not a C corporation at the time of acquisition	Same rule under both regimes. Individuals, S corps, partnerships, trusts (with limitations), and LLCs taxed as partnerships can hold qualifying QSBS. C corporation holders cannot claim the exclusion.
8	Holding period — shares held for the required minimum period before sale	5 years — the only option before OBBBA	50% exclusion at 3 years held; 75% at 4 years; 100% at 5 years³

OBBBA (July 2025) summary: The One Big Beautiful Bill Act raised the flat exclusion cap from $10M to $15M, raised the gross assets threshold from $50M to $75M, and introduced tiered 50/75/100% exclusion rates based on holding period for stock issued after July 4, 2025. These changes do not apply retroactively to stock issued on or before that date.²

Part 2: Holder-type checklists

Which issues are most relevant depends on how you came to hold your equity. Choose the subsection that matches your situation.

Founder checklist

Common for: early co-founders with RSAs or directly issued shares at nominal price per share

83(b) election filed within 30 days of grant if shares were unvested. Missing this election means your holding period clock did not start at grant — it resets as shares vest. An 83(b) filed late cannot be corrected. See the holding period guide.
Company was a C corporation at the time of stock issuance. If the entity was organized as an LLC or S corp and later converted, only shares issued after the conversion date qualify. Verify with the Certificate of Incorporation and Form 8832 or 2553.
Company gross assets were within the threshold at issuance. For seed-stage founders this is almost always satisfied. Verify if the company had raised a prior priced round or held significant non-cash assets at founding.
Basis documented for the 10x cap calculation. Nominal-price founders ($0.0001/share) with large exits are almost always capped by $15M per issuer, not 10x basis. Model both limits in the calculator to confirm which controls your situation.
Co-founder stacking opportunity assessed. Post-OBBBA, each co-founder has their own $15M cap per issuer. A 3-founder company can collectively exclude $45M. Gifting to family members or trusts before an LOI multiplies available exclusion further. See the gifting and stacking guide.
Stock split and recapitalization impact confirmed. Proportional splits generally do not reset the clock or change QSBS status. Non-proportional recapitalizations can be more complex — verify with counsel before any cap table restructuring.
SAFE and convertible note conversion dates identified. If you also hold converted notes, each tranche's QSBS clock starts at the conversion date, not the note issuance date. Multiple tranches may have different holding periods.

Early employee checklist

Common for: employees 1–50 who received RSAs, ISOs, NSOs, or early exercise stock options

Identify which equity type you hold. RSAs and early-exercise ISOs/NSOs can qualify. RSUs generally cannot — RSU shares settle at vesting and are not "originally issued" in the §1202 sense. If you hold RSUs, confirm with a tax advisor before assuming QSBS eligibility. See the early employee guide.
83(b) election filed within 30 days of early exercise (for options) or grant (for unvested RSAs). For ISOs and NSOs, the clock starts at exercise, not grant. If you early-exercised and filed an 83(b), your clock started then. If you exercised at vesting, your clock started at each exercise date.
Option exercise date documented for each lot. Your QSBS holding period starts when you exercised and received shares. Locate the exercise confirmation from your broker or equity platform. Multiple exercise dates mean multiple holding period clocks.
NSO basis vs ISO basis compared for 10x cap. NSOs create compensation income on exercise equal to the spread; that spread becomes part of your cost basis. Higher basis can make the 10x cap more favorable than the flat $15M cap.
ISO AMT exposure modeled for the exercise year. ISO exercise can trigger AMT even if you later qualify for the QSBS exclusion on sale. Exercise-year AMT and sale-year interaction should both be modeled before exercising. See the QSBS and AMT guide.
Multiple lots planned separately for a partial tender or secondary sale. Each lot has its own clock. If you're selling some but not all shares, lot selection matters — prioritize shares that have hit the full holding period and maximize the 10x vs flat cap comparison lot by lot.

Angel investor checklist

Common for: accredited investors who made direct investments in early-stage companies

Company gross assets at the date of your specific investment were within the threshold. For seed rounds this is usually clear. For Series A and later, the gross assets test can fail for later investors even when earlier investors qualified. Verify the company's gross assets on the date of your check, not at founding. See the angel investor guide.
Investment was made directly into the company (original issuance). Secondary purchases from existing holders do not qualify. SPVs and syndicates require §1202(g) look-through analysis — if a fund holds more than 1,000 investors, the fund-level entity may not qualify for pass-through QSBS treatment.
QSBS attestation letter requested from the company. Companies increasingly issue these letters confirming that shares qualify at the round level. Request one from company counsel now if you didn't receive one at issuance. See the documentation guide.
Multi-round investments tracked separately by round date. A Series A investment may not qualify if gross assets exceeded the threshold at that date, even if your earlier seed investment qualifies. Track QSBS eligibility per-round, not per-company.
State conformity checked for your state of residence at the time of sale. Non-conforming states tax QSBS gain even when the federal exclusion applies in full. See the state conformity guide.

Part 3: Timing window checklist timing

QSBS planning has four time windows. The most valuable actions — and the most common mistakes — occur in the first two, long before a transaction is discussed.

At issuance

File 83(b) election within 30 days of grant if shares are unvested
Confirm entity is a domestic C corporation (verify Articles of Incorporation)
Confirm company gross assets were within the threshold at issuance
Request QSBS attestation letter from company counsel
Document original issuance (subscription agreement, board resolution)
If investing through a fund or syndicate, verify §1202(g) eligibility

During the holding period

Monitor company's active business status annually — a pivot into an excluded industry can fail the §1202(e) test during the holding period
Keep equity platform records current (Carta, Pulley, paper certificates)
Note any reorganizations, recapitalizations, or equity class amendments
Track any partial secondary sales — selling shares resets which lot has met the holding period
Request updated attestation letters annually for large positions

Pre-transaction (before LOI / term sheet)

Model exclusion in the calculator — which cap controls (10x basis vs $10M/$15M flat)?
Confirm which holding period milestone has been met for each lot
Evaluate gifting and stacking — gift QSBS shares to family members or trusts before LOI to multiply available exclusion per issuer⁴
Check your state of residence at sale date and whether residency change is feasible
Evaluate charitable planning — donate pre-LOI to a DAF or CRT if philanthropically inclined⁵
Confirm any tender offer won't trigger §1202(c)(3) corporate redemption disqualification
If a stock-for-stock merger (§368), verify §1202(h)(4) carryover into replacement stock
Engage a fee-only advisor to coordinate exclusion, estate, charitable, and post-exit portfolio

Post-transaction

If you sold QSBS before the 5-year mark, you have 60 days to reinvest in new QSBS under §1045 to defer gain — clock starts at sale date¹
Reserve cash for state taxes if you live in a non-conforming state
Reserve for NIIT (3.8% on net investment income) and any remaining LTCG on non-excluded gain
Coordinate with your CPA for Form 8949 / Schedule D QSBS exclusion reporting
Document exclusion claim in file: basis records, holding period evidence, attestation letters

Why the pre-LOI window is irreplaceable

A founder holds 2 million shares with a basis of $0.0001/share ($200 total). Company acquired for $30M. Post-OBBBA flat cap is $15M per issuer. 10x basis cap is only $2,000. The flat cap controls — $15M excluded, $15M taxable at 23.8% combined federal rate = $3.57M federal tax.

If the founder had gifted 1 million shares to an irrevocable non-grantor trust before LOI, both the founder and the trust would each have a separate $15M exclusion per issuer. The entire $30M gain could be excluded — saving $3.57M in federal tax. The same gift made after LOI risks recharacterization under the anticipatory assignment of income doctrine. The window closes when a transaction becomes binding.

Part 4: Documentation checklist document

QSBS eligibility is self-reported on Form 8949 and may be audited years after the sale. The IRS places the burden of proof on the taxpayer. Retain all documents below for at least seven years after the tax filing that claims the exclusion. See the full documentation guide for details on each item and how to reconstruct missing records.

Company-level documents (request from company counsel)

Certificate of Incorporation confirming domestic C corporation status at issuance
Certificate of Good Standing dated at or near issuance date
Board resolutions authorizing the specific stock issuance
Capitalization table as of the issuance date (confirms gross assets were within the threshold)
QSBS attestation letter from company counsel confirming §1202 eligibility of the issuance
Any subsequent annual attestation or certification letters

Shareholder-level documents

Stock certificate or equity platform record showing share count, class, price per share, and issuance date
Subscription agreement or stock purchase agreement
83(b) election — both the filed copy and the IRS acknowledgment or certified mail receipt confirming timely filing
Option grant agreement and exercise confirmation including the exercise date and per-share price (for ISO/NSO holders)
SAFE or convertible note agreement and the conversion notice showing conversion date and resulting share count
Records of consideration paid (canceled checks, wire transfer confirmations)
Tax returns for the year of issuance showing basis reported

For gifted QSBS shares

Gift deed or stock assignment agreement transferring shares to the donee
Gift tax return (Form 709) for any gift exceeding the annual exclusion ($19,000 per donee in 2026)⁶
Donee's basis carryover documentation — donee takes donor's adjusted basis under §1202(h)(2)(A)
Evidence that the transfer occurred before LOI or term sheet (date-stamped equity platform transfer record)

Part 5: State conformity check

The Section 1202 exclusion is federal-only. Your state may tax the same gain in full. Residency is determined at the time of sale — not at issuance. See the state conformity guide for full analysis and planning options.

State	QSBS treatment	Planning note
California	Non-conforming — full gain taxable up to 13.3% CA rate	CA residents owe state tax even on federally excluded gain. On a $15M exclusion, state tax can reach $2M. Pre-sale residency change requires genuine domicile shift — CA FTB audits founder exits aggressively.
Pennsylvania	Non-conforming — full gain taxable at 3.07% PA rate	PA taxes capital gains as ordinary income at a flat 3.07%. No exclusion at any holding period.
Alabama	Non-conforming — full gain taxable	Does not conform to the §1202 exclusion.
Mississippi	Non-conforming — full gain taxable	Does not conform to the §1202 exclusion.
New Jersey	Conforms as of January 1, 2026 (A4455)	NJ was non-conforming until 2026. A4455 enacted conformity effective for tax years beginning on or after January 1, 2026.
Hawaii	Partial — 50% exclusion	Hawaii conforms to 50% of the federal exclusion. On a $15M federal exclusion, Hawaii allows $7.5M exclusion; the remaining $7.5M is taxable at Hawaii's capital gain rate.
All other states (incl. TX, FL, WA, NV, WY)	Conforms (or no income tax)	Most states with an income tax conform to the federal §1202 exclusion. States with no income tax (TX, FL, WA, NV, WY, AK, SD) impose no state capital gains tax.

Part 6: Questions to ask a QSBS advisor

Use these questions to assess an advisor's depth of QSBS knowledge before engaging. A specialist will answer most of them directly. A generalist may not know several of them at all. See the QSBS advisor selection guide for additional vetting criteria.

Can you walk me through how the gross assets test applied to my company at the date of my specific investment or grant?
Does the OBBBA tiered holding period apply to my shares — are they pre- or post-July 4, 2025 stock?
How does my 83(b) election, ISO exercise date, or option exercise date affect the holding period clock for each lot?
What is my estimated exclusion under both the flat cap and the 10x basis cap — which one controls my situation?
If I gift shares to my spouse, adult children, or a trust before the LOI, how does the exclusion math change, and what are the gift tax mechanics?
What is my combined AMT exposure this year if I exercise ISOs before a sale?
I live in [state] — how should state tax factor into the sale structure, proceeds reserve, and timing?
After the sale, what should my total tax reserve be before deploying the after-tax proceeds?
If any shares don't qualify, is Section 1045 rollover available, and what are the 60-day reinvestment requirements?

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Sources

26 U.S.C. §1202 — Partial exclusion for gain from certain small business stock, Cornell Legal Information Institute (LII). Section 1202(b)(1) states the applicable limitation; §1202(b)(2) states the 10x basis alternative. Section 1202(f) covers the holding period. Section 1045 rollover rules are in 26 U.S.C. §1045.
One Big Beautiful Bill Act (H.R. 1, 119th Congress), enacted July 2025. Raised QSBS exclusion cap to $15M, gross assets threshold to $75M for post-July 4, 2025 stock, and introduced tiered 50/75/100% exclusion rates based on 3/4/5-year holding periods for stock issued after July 4, 2025.
IRS Publication 550 — Investment Income and Expenses (2025 edition). See the section on small business stock for holding period requirements and exclusion percentage discussion.
26 U.S.C. §1202(h)(2)(A) — Transfer of QSBS by gift preserves QSBS character in the donee's hands. Donee takes donor's adjusted basis and holding period, and each donee receives a separate per-issuer exclusion cap.
IRS — Charitable Contribution Deductions. Contributions of long-term capital gain property to a public charity or donor-advised fund eliminate capital gain recognition. The 30% of AGI deduction limit applies for appreciated non-cash gifts to public charities.
IRS — Frequently Asked Questions on Gift Taxes. Annual gift tax exclusion is $19,000 per donee for 2026 per IRS Rev. Proc. 2025-61 (inflation adjustment). Lifetime exemption is $15,000,000 for 2026 per OBBBA permanent increase (enacted July 2025).

Tax values verified as of June 2026. OBBBA provisions are effective for stock issued after July 4, 2025, unless otherwise noted.