The QSBS Loophole and How to Pay Zero Tax on Up to $10 Million in Gains
Equity Issuance, Preferred Shares, and Avoiding Investor Deal-Breakers
Entrepreneurs and early-stage investors have a narrow window in 2025 to lock in legally tax-free exits thanks to §1202’s Qualified Small Business Stock (QSBS) exemption. This article is a hands-on field manual—not theory—showing you exactly how to:
Issue equity (common, preferred, SAFEs, convertibles) without tripping the anti-churning landmines.
Multiply the $10 million cap across family members or dynasty trusts.
Navigate the coming 2025 Congressional overhaul that could raise the ceiling, shorten the holding period, and juice your after-tax IRR.
Keep venture investors happy while still preserving every QSBS dollar.
If you want to slash—or obliterate—capital-gains tax on your next startup liquidity event, read on. The difference between a well-drafted term sheet and a sloppy one can be an eight-figure IRS check.
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1. 2025: Why Qualified Small Business Stock Matters More Than Ever
Congress just moved QSBS back onto the front page. On June 16, 2025, the Senate Finance Committee’s draft of H.R. 1 (“One Big Beautiful Bill”) proposed the first significant rewrite of §1202 since 2010. Key headline changes for stock acquired after the bill is enacted include: a higher asset limit ($75 M), a bigger per-issuer cap ($15 M, inflation-indexed), and a three-year phased-in holding period (50 % exclusion at year 3, 75 % at year 4, 100 % at year 5).
For founders and early-stage investors, that’s a potential federal capital-gains rate of 0% on $15M per company, plus another 0% at the state level in 44 jurisdictions. If you’re structuring a 2025 financing, you now have a once-in-a-decade window to lock in the richer rules.
2. QSBS Fundamentals (Current Law)
100 % federal exclusion on the greater of $10 M or 10× basis for stock issued after 9-27-2010 and held > 5 years.
C-corp at issuance with aggregate gross assets ≤ $50 M before and immediately after the round.
Active business test: ≥ 80 % of assets used in a qualified trade or business.
Original issuance only. Secondary purchases and most option grants don’t qualify until exercised.
Redemption “anti-churning” rules: Company-level buybacks can trigger QSBS if they exceed 5% of the value in the one-year window straddling the issuance, or any targeted redemptions of the same holder within two years.
A clean $10 million gain translates to approximately $2.38 million in federal tax savings at 2025 rates (20% long-term capital gains + 3.8% NIIT).