Updated December 2025
You Don't Qualify for QSBS. Here's What to Do Next.
If you just ran the numbers and realized you don't qualify—or won't qualify in time—you're not alone. This is one of the most common and expensive discoveries in startup tax planning.
This Happens More Than You Think
One founder discovered 3 days before closing that her holding period started at exercise, not grant. Her $2.1M gain became fully taxable—roughly $500K in federal taxes she thought she'd avoid.
The good news: depending on your situation, you may still have options.
Common Reasons You Don't Qualify
Selling before 5 years (most common)
Pre-July 2025 stock requires a full 5-year hold. Selling even one day early means 0% exclusion.See your options →
Secondary market purchase
QSBS requires original issuance. Stock bought from another shareholder—not directly from the company—typically doesn't qualify.
Company exceeded $50M/$75M gross assets
The company must have had $50M or less in gross assets at the time your stock was issued ($75M for post-July 2025 stock). If the company was already too large, the stock doesn't qualify.
Not a C-corporation at issuance
The company must have been a C-corp when your stock was issued. LLCs, S-corps, and partnerships don't count—even if they later converted.
Non-qualified trade or business
Certain industries don't qualify: financial services, law, accounting, consulting, hospitality, farming, and mineral extraction businesses are excluded.
Your Options Now
Option 1: Section 1045 Rollover(if you held 6+ months)
If you've held for at least 6 months but less than 5 years, you can defer the gain by reinvesting in new qualifying QSBS within 60 days.
How it works:
- • Sell your current QSBS
- • Reinvest proceeds in new QSBS within 60 days
- • Your holding period transfers to the new stock
- • When combined period hits 5 years, you can sell with full exclusion
The catch: finding qualifying replacement QSBS on a 60-day timeline isn't easy.Learn more about 1045 rollovers →
Option 2: Delay the Sale(if you're close)
If you're within months of qualifying and have any control over timing, waiting could save hundreds of thousands of dollars.
Example: You qualify on March 15, 2026. The deal closes February 28, 2026. If you can negotiate a 3-week delay, that could be worth $400K+ in tax savings.
Option 3: Installment Sale(if deal structure allows)
If the deal hasn't closed, you might be able to structure it so payments come after your qualification date.
Gain is recognized when you receive payment, not at closing. If your first payment comes after the 5-year mark, that portion may qualify for QSBS exclusion.
Option 4: State Tax Planning
Even if you don't qualify for federal QSBS, you might reduce your state tax burden.
- If you're in California: You'd owe 13.3% regardless of QSBS status. Some founders relocate to no-tax states (TX, FL, WA, NV) before a liquidity event.
- Timing matters: Your state of residence on the sale date determines which state taxes apply.
Option 5: Other Tax Strategies
If QSBS isn't available, other strategies might help reduce your tax burden:
- Qualified Opportunity Zone: Reinvest gains in a QOZ fund to defer and potentially reduce taxes.
- Charitable giving: Donating appreciated stock to a donor-advised fund avoids capital gains entirely.
- Tax-loss harvesting: Offset gains with losses from other investments in the same year.
These strategies require professional guidance. Consult a tax attorney or CPA who specializes in equity compensation.
If None of These Options Apply
Sometimes there's no way to qualify. The stock was issued when the company was too large. You bought on the secondary market. The industry doesn't qualify.
In that case, your gain is taxable as long-term capital gains (if held over a year) or ordinary income (if less than a year).
Typical tax rates on gains:
- • Federal: 20% + 3.8% NIIT = 23.8% for high earners
- • California: 13.3% on top of federal
- • New York City: up to 12.7% state + local
A $2M gain in California with no QSBS: roughly $740K in combined taxes.
Double-Check Your Situation
Make sure you're using the right dates. The most common mistake is using the wrong holding period start date.
QSBS Savings Calculator
Estimate your Section 1202 tax savings in 60 seconds
Your Stock
Key Dates
Your holding period starts at EXERCISE, not grant. This is the #1 mistake people make.
Value
What you paid, or the value included in your income
Your Location
Your state at time of sale determines tax treatment
Related Questions
Need to verify your holding period?
Check Your QSBS Status