The **QSBS exclusion** is the most generous provision in the US individual tax code: sell qualifying stock in a domestic C corporation after five years and the federal tax on the gain can be zero, up to the greater of $15 million or ten times your basis. The One Big Beautiful Bill Act rebuilt Section 1202 for stock issued after 4 July 2025, raising the per-issuer cap from $10 million, lifting the company-size test from $50 million to $75 million of aggregate gross assets, and — the genuinely new feature — introducing a tiered holding period that pays out 50% at three years and 75% at four rather than nothing until five.
For a US-citizen founder living in the UK there is a second half to this story that almost no US-facing article covers, and it is the half that decides whether you keep the money. Section 1202 removes the gain from your US return. It does nothing to your UK return. If you are UK-resident on the day the deal completes, HMRC taxes the whole gain, the US exclusion leaves you with no US liability to credit that UK tax against, and the most valuable relief in the American tax code converts into a straightforward 24% UK bill. Here is how the rules work and how the timing decides the outcome.
What the QSBS exclusion is and which stock qualifies
Section 1202 excludes gain on the sale of qualified small business stock held by a non-corporate taxpayer. The conditions are cumulative and unforgiving. The issuer must be a domestic C corporation — not an LLC, not an S corporation, and not a UK company. You must have acquired the stock at original issuance, directly from the company, in exchange for money, property or services, rather than buying it from another shareholder. The corporation's aggregate gross assets must not have exceeded the threshold immediately after the issuance: $75 million for stock issued after 4 July 2025, and $50 million for earlier stock.
The company must also pass an active business test throughout substantially all of your holding period, using at least 80% of its assets in a qualified trade or business. That definition is written as an exclusion list, and the list is long: health, law, engineering, architecture, accounting, actuarial science, performing arts, consulting, athletics, financial services and brokerage are all out, as are farming, businesses relying on depletable natural resources, and hotels, motels and restaurants. A great many profitable companies simply cannot produce QSBS, and founders often discover this at diligence rather than at incorporation.
The tiered holding period: 50% at three years, 75% at four, 100% at five
The old rule was binary. Five years and a day gave you a 100% exclusion; four years and 364 days gave you nothing at all, and the number of founders who sold three months early and paid full freight is not small. For stock issued after 4 July 2025, OBBBA replaced the cliff with a staircase: hold for at least three years and 50% of the gain is excluded, four years and 75% is excluded, five years and the full 100% is excluded.
That is a meaningful change in the economics of an early exit. It does not, however, make a three-year sale tax-free, and the arithmetic on the remaining slice is worse than most people assume. Gain that is not excluded under Section 1202 is taxed at the 28% maximum rate rather than the ordinary 20% long-term capital gains rate, and the 3.8% net investment income tax applies on top — a combined 31.8%. At the 50% tier the effective federal rate on the whole gain is therefore about 15.9%; at the 75% tier it is about 7.95%; at five years it is nil.
- Three years or more: 50% excluded; effective federal rate on the whole gain about 15.9%.
- Four years or more: 75% excluded; effective federal rate about 7.95%.
- Five years or more: 100% excluded; no federal capital gains tax and no NIIT on the excluded gain.
- Non-excluded gain is taxed at 28%, not 20%, plus 3.8% NIIT — a combined 31.8%.
- The tiers apply only to stock issued after 4 July 2025; earlier stock keeps the five-year cliff.
The $15 million cap and the ten-times-basis alternative
The exclusion is limited per issuer to the greater of two figures. The first is a flat cap, raised by OBBBA from $10 million to $15 million for stock issued after 4 July 2025, and indexed for inflation for tax years beginning after 2026. The second is ten times your aggregate adjusted basis in the QSBS of that issuer disposed of in the year. Because the cap is per issuer rather than per lifetime, a serial founder can use it again on a genuinely separate company.
For most founders the flat cap governs, because founder stock is typically issued for a nominal amount and ten times almost nothing is still almost nothing. For an investor who put real money in, the basis route can be far more valuable: $5 million invested supports a $50 million exclusion. This is also why contributing appreciated property to a company in exchange for QSBS deserves careful thought — your basis for the ten-times test is generally the fair market value of the property at contribution, which can lift the ceiling substantially.
The alternative minimum tax detail that catches the lower tiers
There is a wrinkle in the tiered structure that the headline coverage tends to skip. Gain excluded under the full 100% five-year exclusion is not an alternative minimum tax preference item — the exclusion is clean. Gain excluded at the 50% and 75% tiers is treated differently: 7% of the excluded amount is an AMT preference item, which can pull a large exit into AMT and add tax that the effective-rate arithmetic above does not show.
The practical consequence is that the gap between selling at four years and selling at five is wider than 7.95% versus zero. It is 7.95% plus an AMT exposure versus nothing at all, plus the clean treatment for NIIT. If your holding period crosses the five-year mark within a plausible negotiating window, the value of waiting is usually larger than any price concession you would make to close early. You can size the difference with our QSBS calculator.
Section 1045: the rollover that buys you time
If a sale is forced before you reach a tier you want, Section 1045 offers a deferral rather than an exclusion. Where you have held the original QSBS for more than six months, you can roll the proceeds into replacement QSBS purchased within 60 days of the sale and defer the gain. The replacement stock takes a reduced basis, so the deferred gain resurfaces on a later disposal, but critically the holding period of the original stock tacks onto the replacement.
That tacking is the whole point. A founder forced out at two years can roll into new QSBS and carry the two years forward, reaching the three-year 50% tier — or the five-year 100% tier — on the replacement stock much sooner than a fresh purchase would allow. The 60-day window is short and unforgiving, and the election is made on the return for the year of sale, so this has to be planned before completion rather than discovered afterwards.
Where the QSBS exclusion collapses for a founder living abroad
Now the part that matters if you are reading this from London. Section 1202 is a US federal provision. It is not a treaty provision, and there is no equivalent relief in the UK code. The UK taxes its residents on worldwide gains, and a US-citizen founder who is UK-resident when the sale completes is within the charge to UK capital gains tax on the whole gain — the excluded portion included, because HMRC does not recognise the exclusion at all.
The double bind is what happens next. Normally, UK tax on a gain is relieved against US tax through the foreign tax credit. But if Section 1202 has already reduced your US tax on that gain to zero, there is nothing left to credit the UK tax against. The credit is not lost in the sense of being refused; it is simply worthless, because a credit can only offset a liability that exists. You end up paying UK capital gains tax at 24% on a gain the US has told you is tax-free, and receiving no US benefit for it whatsoever.
What that costs in practice
Take a founder with $15 million of qualifying gain on stock held six years. Sell as a US resident and the federal tax is zero. Sell on the same terms while UK-resident and HMRC charges capital gains tax at 24% on the sterling equivalent — roughly £2.9 million on a £12 million gain at the exchange rates prevailing in mid-2026 — with no US credit to soften it and no UK relief to reduce it. Business Asset Disposal Relief does not help either, because it applies to UK trading companies and its £1 million lifetime limit at the 18% rate from April 2026 is a rounding error against a fifteen-million-dollar exit.
The same problem in reverse is why the UK sale of a UK business by a US citizen usually works out better than founders expect: there, the UK tax is high and fully creditable. We set out that direction of travel in selling a UK business as a US citizen and the current UK relief position in Business Asset Disposal Relief in 2026. QSBS is the one case where the asymmetry runs the other way, and it runs hard.
Timing, residence and the traps in moving
The obvious response — leave the UK before you sell — is right in principle and dangerous in execution. The UK statutory residence test decides the year of departure by day counts and ties, and split-year treatment is available only in defined cases. More importantly, the temporary non-residence rules can reach back: if you leave, sell, and return within a defined period after a long enough prior residence, gains realised during the gap can be brought into charge in the year of return as though you had never left.
There is a US mirror image too. Renouncing citizenship to escape the problem triggers the expatriation regime and, for covered expatriates, a mark-to-market exit tax that can crystallise the very gain you were trying to protect. Neither route is a simple matter of buying a plane ticket. Our guides to the UK statutory residence test for Americans and the expatriation rules on Form 8854 set out where the lines actually fall.
State tax does not follow the federal exclusion
Founders who keep a US state connection have a third layer to consider. Most states start from federal taxable income and therefore pick up the exclusion automatically, but not all of them do. California, Alabama, Mississippi and Pennsylvania do not conform, and California in particular taxes QSBS gain in full at rates rising to 13.3%. Conformity to the new OBBBA tiers is a separate question again, since a state that conforms to an older version of the federal code does not automatically adopt the 2025 amendments.
For a founder who moved from San Francisco to London, this can mean a California residency argument and a UK residence argument running at the same time on the same gain, with the federal exclusion doing nothing to help either. Establishing clean non-residence in the departing state before the sale is a separate project from the UK analysis, and it usually has to start earlier.
The reporting and documentation you will need
The exclusion is claimed on your return, but it is proved by the company's records. You will need evidence of original issuance, of the aggregate gross assets test being met immediately after issuance, and of the active business test across the holding period. Buyers' counsel now asks for this in diligence as a matter of course, and the answer is far easier to assemble contemporaneously than five years later. Ask the company for a QSBS attestation at issuance and again annually.
On the US side, the sale is reported on Form 8949 and Schedule D with the exclusion shown as an adjustment, and the non-excluded portion carries the 28% rate and, where applicable, the net investment income tax. The general framework for the exclusion is set out in IRS Publication 550. On the UK side the gain goes on the capital gains pages of your self assessment return at the rates published on GOV.UK, and the sterling translation is done at the rates on the acquisition and disposal dates, which can create a gain in one currency and a loss in the other.
What good planning looks like
The order of operations matters more than any single election. Confirm the stock is QSBS at issuance rather than assuming it. Track the tier dates in the same place you track vesting. Decide the residence question at least a full tax year before a plausible exit, not during the sale process, because the statutory residence test is settled by day counts you have already accrued by the time an offer arrives. Where the numbers justify it, model a Section 1045 rollover as a live alternative rather than an emergency measure.
And model the whole position in one place. A founder with $15 million of QSBS gain, a UK address, a California history and a five-year clock that expires in eight months is looking at four different tax outcomes depending on when and where the deal closes, and the spread between the best and worst is frequently larger than the difference between competing offers. Our US capital gains tax calculator will give you the federal baseline; the cross-border layer needs modelling properly.
How TaxStone handles a QSBS exit
At TaxStone we treat a Section 1202 exit as a residence question first and a tax-code question second. That means fixing the UK statutory residence position, checking whether any temporary non-residence exposure exists, confirming the state position, and only then optimising the federal tiers, the cap and any rollover. Doing it in the other order produces a technically perfect US return attached to an avoidable seven-figure UK bill.
If you hold QSBS and live outside the United States, the single most useful thing you can do is get the timeline modelled before the process starts. Contact us or book a free consultation and we will run the exit under each residence and each tier scenario so you can see the whole board before you negotiate: /get-started.
The short version
For stock issued after 4 July 2025, the QSBS exclusion caps at the greater of $15 million or ten times basis per issuer, the company-size test is $75 million of aggregate gross assets, and the holding period is tiered at 50% for three years, 75% for four and 100% for five. Non-excluded gain is taxed at 28% plus 3.8% NIIT, and the 50% and 75% tiers carry a 7% AMT preference on the excluded portion. Stock issued on or before 4 July 2025 keeps the old $10 million cap, $50 million asset test and five-year cliff.
For a US-citizen founder resident in the UK, all of that is secondary. Section 1202 eliminates the US tax and therefore eliminates the liability the foreign tax credit needs in order to work, leaving UK capital gains tax at 24% on the full gain with nothing to offset it. The exclusion is worth its face value only if you are outside the UK charge when the deal completes — and the statutory residence test decides that long before completion day arrives.
