Help clients maximize QSBS tax benefits under Section 1202

Key takeaways

• Qualified Small Business Stock (QSBS) is stock that may qualify for the capital gains exclusion available under Section 1202 of the Internal Revenue Code.
• Many high-net-worth clients own QSBS, often without realizing it, creating avenues for advisors to help identify potential tax-savings opportunities before a liquidity event.
• The One Big Beautiful Bill Act expanded QSBS eligibility and benefits for stock acquired after July 4, 2025, increasing exclusion limits and providing partial tax benefits after shorter holding periods.

Advisors have opportunities to deliver value with QSBS tax benefits

As more founders, startup employees and early investors approach liquidity events, Qualified Small Business Stock (QSBS) may represent one of the most valuable tax-saving opportunities today.

Many high-net-worth clients own QSBS, often without realizing it, creating avenues for advisors to help identify potential tax-savings opportunities for clients before a liquidity event.

Recent tax law changes under the One Big Beautiful Bill Act may expand the opportunity set for advisors to deliver value to clients.

The QSBS rules are complex and clients should consult with their tax and legal advisors before making any decisions or taking any actions with respect to their QSBS.

What is QSBS and why does it matter for your clients?

Qualified Small Business Stock, commonly known as QSBS or QSB stock, is stock issued by a “qualified small business” under Section 1202 of the Internal Revenue Code and that satisfies certain other requirements.

If these requirements are met, noncorporate clients who hold QSBS may be able to exclude a substantial portion of their capital gains realized for U.S. federal income tax purposes upon selling or exchanging their shares. Some clients may also benefit from state income tax exclusions as many states follow the U.S. federal tax treatment of QSBS, but state rules may vary significantly.

For clients who have spent many years building or investing in a successful company, the value of these tax exclusions may be significant.

By identifying potential eligibility before events like a business sale, merger or IPO, you may be able to help clients preserve more after-tax wealth.

Who may qualify for Section 1202 tax benefits?

Many advisors associate QSBS exclusively with business founders, but there are additional scenarios where clients may potentially benefit from the Section 1202 tax exclusion. Below are examples of such possible scenarios:

• Employees may receive qualifying shares through compensation arrangements.
• Angel investors and venture capital investors may acquire QSBS through direct investments in eligible companies.
• Certain trusts and estate planning structures may also hold qualifying shares under specific circumstances.

What are the eligibility requirements for the Section 1202 tax exclusion?

Given the many technical requirements, exceptions and special rules under Section 1202, clients should consult qualified tax and legal professionals when assessing eligibility. However, some broad criteria under Section 1202 that may help identify potential opportunities include:

• The stock must have been originally issued after August 10, 1993 by a U.S. C corporation.
• The company must satisfy gross asset limitations, and at least 80% of its assets must be used for actively conducting a qualifying trade or business.
• Companies in certain industries, including many professional service businesses, are excluded from eligibility.
• The shareholder must not be a C corporation and must have acquired the shares directly from the issuing company in exchange for money or property other than stock or as compensation for services provided to the company.

Additionally, holders of QSBS must satisfy applicable holding-period requirements in order to benefit from the exclusion. Clients who haven’t held the stock long enough to qualify, may wish to consider the tradeoffs of postponing the sale if possible.

How did the One Big Beautiful Bill Act change the rules for QSBS?

The One Big Beautiful Bill Act expanded Section 1202 eligibility and tax benefits for QSBS acquired after July 4, 2025. Shares acquired on or before that date remain subject to the prior rules.

The changes affect holding period requirements, exclusion limits and the asset threshold used to determine whether a company qualifies as a small business under Section 1202.

These changes may allow more of your clients to benefit from the Section 1202 tax exclusion, and may also provide new opportunities for meaningful after-tax savings for clients experiencing liquidity events before reaching the traditional five-year QSBS qualified holding period.

Early planning for a business sale can help clients enhance Section 1202 tax exclusions

The anticipation of a liquidity event such as an IPO, merger or business sale is often a catalyst for additional business planning, estate planning, charitable giving and multigenerational wealth transfer discussions. Ensure your clients consider how those decisions may affect future Section 1202 eligibility. With advanced planning, clients may have opportunities to enhance the tax benefits.

Clients who are considering incorporating a business, changing the capital structure of their business or changing the U.S. federal income tax classification of their business (such as through a "check-the-box" election) should also carefully consider any potential consequences for their QSB stock. Under certain circumstances, such changes may have the effect of increasing the basis of a client's QSBS, but clients should consult with their individual advisors to understand all of the potential implications.

No matter how "simple" it appears, even different ways of approaching a sale of QSBS can affect the benefits thereof. For example, consider the fact that different lots may have different bases for tax purposes and could therefore affect the eligible exclusions.

The most effective QSBS planning often occurs years before a business transaction. Once a liquidity event is imminent, planning opportunities may become more limited.

Estate planning may increase Section 1202 tax savings

Your clients may wish to gift QSB stock to accomplish important estate planning objectives, such as providing for loved ones, protecting assets or avoiding probate. Such gifts may be made outright or in trust.

Stock gifted to individuals or non-grantor trusts generally retains its QSBS status, and each recipient may receive its own QSBS exclusion. When structured appropriately, this kind of estate planning may also have the effect of enhancing QSBS benefits upon a future liquidity event. Some practitioners refer to this as QSBS “stacking,” though the rules governing such estate planning techniques are complex and technical.

Amongst other things, it is generally good practice to carefully document the underlying estate planning intentions clearly and to ensure that any transfer is completed well before a contemplated sale, noting that the shares may have a lower value for gift tax purposes at such time.

In addition, Treasury recently announced that they are considering releasing guidance on this subject, increasing the importance of cautious planning. Given the complexity, advisors should collaborate with their clients and their clients’ experienced tax and estate planning professionals far in advance of a sale.

Position QSBS within a broader wealth strategy

Proactively integrating tax planning considerations like QSBS gain exclusions within a broader financial plan may have a significant impact on a client’s after-tax wealth.

The QSBS rules are complicated and clients should be sure to discuss their individual circumstances with their tax advisors prior to engaging in any transactions.

BlackRock can help you plan and execute strategies that deepen your value to high-net worth clients. Ask your BlackRock representative for more information and explore our online resources.