Gains on Qualified Small Business Stock: Investment Taxes (2025 IRS Guide)

This guide covers “Gains on Qualified Small Business Stock” within investment taxes. The following material presents the IRS treatment of this topic, including the qualifications, exceptions, and examples in the source section. Read the rules alongside the facts of your own situation before deciding what to report, deduct, or document.

Adapted from Publication 550 (2025), Investment Income and Expenses, published by the Internal Revenue Service. This guide retains the source edition’s years, amounts, deadlines, and examples. It is guidance for that edition, not a statement that the same figures apply to every tax year.

Gains on Qualified Small Business Stock

This section discusses two provisions of the law that may apply to gain from the sale or trade of qualified small business stock. You may qualify for a tax-free rollover of all or part of the gain. You may be able to exclude gain from your income.

Qualified small business stock.

This is stock that meets all the following tests.

1. It must be stock in a C corporation.

2. It must have been originally issued after August 10, 1993.

3. The corporation must have total gross assets of $50 million or less at all times after August 9, 1993, and before it issued the stock. Its total gross assets immediately after it issued the stock must also be $50 million or less.

   When figuring the corporation's total gross assets, you must also count the assets of any predecessor of the corporation. In addition, you must treat all corporations that are members of the same parent-subsidiary controlled group as one corporation.

4. You must have acquired the stock at its original issue, directly or through an underwriter, in exchange for money or other property (not including stock), or as pay for services provided to the corporation (other than services performed as an underwriter of the stock). In certain cases, your stock may also meet this test if you acquired it from another person who met this test, or through a conversion or trade of qualified small business stock that you held.

5. The corporation must have met the active business test, defined next, and must have been a C corporation during substantially all the time you held the stock.

6. Within the period beginning 2 years before and ending 2 years after the stock was issued, the corporation cannot have bought more than a de minimis amount of its stock from you or a related party.

7. Within the period beginning 1 year before and ending 1 year after the stock was issued, the corporation cannot have bought more than a de minimis amount of its stock from anyone, unless the total value of the stock it bought is 5% or less of the total value of all its stock.

For more information about tests 6 and 7, see the regulations under section 1202 of the Internal Revenue Code.

Active business test.

A corporation meets this test for any period of time if, during that period, both the following are true.

• It was an eligible corporation, defined below.

• It used at least 80% (by value) of its assets in the active conduct of at least one qualified trade or business, defined below.

Exception for Specialized Small Business Investment Company (SSBIC).

Any SSBIC is treated as meeting the active business test. An SSBIC is an eligible corporation licensed to operate under section 301(d) of the Small Business Investment Act of 1958, as in effect on May 13, 1993.

Eligible corporation.

This is any U.S. corporation other than:

• A Domestic International Sales Corporation (DISC) or a former DISC;

• A corporation that has made, or whose subsidiary has made, an election under section 936 of the Internal Revenue Code;

• A regulated investment company;

• A REIT;

• A REMIC;

• Certain financial asset securitization investment trusts (FASITs); or

• A cooperative.

Qualified trade or business.

This is any trade or business other than:

• One involving services performed in the fields of health, law, engineering, architecture, accounting, actuarial science, performing arts, consulting, athletics, financial services, or brokerage services;

• One whose principal asset is the reputation or skill of one or more employees;

• Any banking, insurance, financing, leasing, investing, or similar business;

• Any farming business (including the business of raising or harvesting trees);

• Any business involving the production or extraction of products for which percentage depletion can be claimed; or

• Any business of operating a hotel, motel, restaurant, or similar business.

Rollover of Gain

You may qualify for a tax-free rollover of capital gain from the sale of qualified small business stock held more than 6 months. This means that, if you buy certain replacement stock and make the choice described in this section, you postpone part or all of your gain.

You postpone the gain by adjusting the basis of the replacement stock as described in Basis of replacement stock, later. This postpones your gain until the year you dispose of the replacement stock.

You can make this choice if you meet all the following tests.

• You buy replacement stock during the 60-day period beginning on the date of the sale.

• The replacement stock is qualified small business stock.

• The replacement stock continues to meet the active business requirement for small business stock for at least the first 6 months after you buy it.

Amount of gain recognized.

If you make the choice described in this section, you must recognize the capital gain only up to the following amount.

• The amount realized on the sale, minus

• The cost of any qualified small business stock you bought during the 60-day period beginning on the date of sale (and did not previously take into account on an earlier sale of qualified small business stock).

If this amount is less than the amount of your capital gain, you can postpone the rest of that gain. If this amount equals or is more than the amount of your capital gain, you must recognize the full amount of your gain.

Basis of replacement stock.

You must subtract the amount of postponed gain from the basis of your replacement stock.

Holding period of replacement stock.

Your holding period for the replacement stock includes your holding period for the stock sold, except for the purpose of applying the 6-month holding period requirement for choosing to roll over the gain on its sale.

Pass-through entity.

A pass-through entity (a partnership, S corporation, or mutual fund or other regulated investment company) may also make the choice to postpone gain. The benefit of the postponed gain applies to your share of the entity's postponed gain if you held an interest in the entity for the entire period the entity held the stock.

If a pass-through entity sold qualified small business stock held for more than 6 months and you held an interest in the entity for the entire period the entity held the stock, you may also choose to postpone gain if you, rather than the pass-through entity, buy the replacement stock within the 60-day period.

How to report gain.

Report the entire gain realized from the sale in Part I or Part II of Form 8949. To make the election to postpone gain, report the gain as you would if you were not making the election. Enter “R” in column (f). Enter the amount of the postponed gain as a negative number in column (g). Put it in parentheses to show it is negative. Complete all remaining columns.

You must make the choice to postpone gain no later than the due date (including extensions) for filing your tax return for the year in which you sold the stock. If your original return was filed on time, you may make the choice on an amended return filed no later than 6 months after the due date of your return (excluding extensions). Enter “Filed pursuant to section 301.9100-2” at the top of the amended return and file it at the same address you used for your original return.

Section 1202 Exclusion

You can exclude from your gross income up to 50% of your gain from the sale or exchange of qualified small business stock (QSBS) held for at least 5 years, and acquired before February 17, 2009. The exclusion can be up to 75% for QSBS acquired between February 17, 2009, and September 27, 2010, and up to 100% exclusion for QSBS acquired after September 27, 2010. For further information about changes to section 1202, see section 1202 of the Internal Revenue Code.

Specialized Small Business Investment Company (SSBIC) stock.

If the stock is SSBIC stock you bought as replacement property for publicly traded securities you sold at a gain before 2018, you must reduce the basis of the stock by the amount of any postponed gain on that earlier sale. But do not reduce your basis by that amount when figuring your section 1202 exclusion.

Limit on eligible gain.

The amount of your gain from the stock of any one issuer that is eligible for the exclusion in 2022 is limited to the greater of:

• Ten times your basis in all qualified stock of the issuer you sold or exchanged during the year; or

• $10 million ($5 million for married individuals filing separately), minus the amount of gain from the stock of the same issuer you used to figure your exclusion in earlier years.

How to report gain.

Report the sale or exchange on Form 8949, Part II, with the appropriate box checked, as you would if you were not taking the exclusion. Then enter “Q” in column (f) and enter the amount of the excluded gain as a negative number in column (g). Put it in parentheses to show it is negative. Complete all remaining columns. If you are completing line 18 of Schedule D (Form 1040), enter as a positive number the amount of the exclusion on line 2 of the 28% Rate Gain Worksheet in the Schedule D (Form 1040) instructions. But if you exclude 60% of the gain, enter ²/₃ of the exclusion. If you exclude 75% of the gain, enter ¹/₃ of the exclusion. If you exclude 100% of the gain, do not enter an amount.

More information.

For information about additional requirements that may apply, see section 1202 of the Internal Revenue Code.

Empowerment zone business stock.

You can exclude up to 60% of your gain if you meet all the following additional requirements.

1. You sell or trade stock in a corporation that qualifies as an empowerment zone business during substantially all of the time you held the stock.

2. You acquired the stock after December 21, 2000, and before February 18, 2009.

3. The gain from the sale or exchange of the stock is attributable to periods on or before December 31, 2018.

Condition 1 will still be met if the corporation ceased to qualify after the 5-year period that begins on the date you acquired the stock. However, the gain that qualifies for the 60% exclusion cannot be more than the gain you would have had if you had sold the stock on the date the corporation ceased to qualify.

Note:

If either the 75% or 100% exclusion applies, then the 60% exclusion does not apply.

Using the guidance

Keep the documents that establish the dates, amounts, and circumstances described above. References to other chapters, forms, worksheets, or earlier and later sections refer to the linked IRS publication. Check the full publication and its updates before relying on a rule for a different tax year or a situation not addressed here.

Sources and further reading

• Publication 550 (2025), Investment Income and Expenses: Sales and Trades of Investment Property — Capital Gains and Losses — Gains on Qualified Small Business Stock — Internal Revenue Service; 2025 edition.

The cited U.S. government text is in the public domain. Source accessed October 28, 2026. Fynoptic has organized this material for educational use and is independent of, and not endorsed by, the IRS.