If you’re planning on selling your business, you might be eligible to exclude up to $15 million from the sale for tax purposes if you meet certain parameters. This is made possible by Section 1202 of the Internal Revenue Code, also known as the Small Business Stock Capital Gains Exclusion.

As originally signed into law, this section can only be applied to qualified small business stock acquired after Sept. 27, 2010, that is held for more than five years. Within the Protecting Americans from Tax Hikes (PATH) Act in 2015, one tax benefit made permanent by the Obama administration was the Small Business Stock Capital Gains Exclusion. The intention of this section in the Internal Revenue Code was to provide an incentive for non-corporate taxpayers to invest in small businesses.

Before Feb. 18, 2009, Section 1202 allowed up to 50% of capital gains to be excluded from gross income. The American Recovery and Reinvestment Act then increased the exclusion rate from 50% to 75% for stock purchased between Feb. 18, 2009, and Sept. 27, 2010. This was done to stimulate the small business sector. The latest revision to Section 1202—where we are at today—provides for 100% exclusion of any capital gain if the acquisition of the small business stock was after Sept. 27, 2010.

The capital gains that are exempt from tax are also exempt from the net investment income (NII) tax that is applied to most investment income at a rate of 3.8%. The limit upon the amount of gain a shareholder can exclude is limited to either $10 million or 10x the adjusted basis of the stock. Any taxable portion of the gain from selling small business stock is assessed at the maximum tax rate of 28%.

What you need to know

Note: Not all small business stocks qualify for this tax break. There are some very stringent requirements that must be followed in regard to small business stock:

It was issued by a domestic C-corporation other than a hotel, restaurant, financial institution, real estate company, farm, mining company or business relating to law, engineering or architecture.
It was originally issued after Aug. 10, 1993, in exchange for money, property not including stocks or as compensation for a service rendered.
On the date of stock issue and immediately after, the issuing corporation had $50 million or less in assets.
The use of at least 80% of the corporation’s assets is for the active conduct of one or more qualified businesses.
The issuing corporation does not purchase any of the stock from the taxpayer during the four years beginning two years before the issue date.
The issuing corporation does not significantly redeem its stock within two years beginning one year before the issue date. A significant stock redemption is redeeming an aggregate value of stocks that exceeds 5% of the total value of the company’s stock.

On July 4, 2025, the One Big Beautiful Bill (OBBB) was signed into law. Within this bill, there were some changes to section 1202. A tiered system was implemented for eligible QSBS that was issued after July 4, 2025. Within this tier, you are now eligible for partial gain exclusion after a three-year holding period, rather than having to wait the entire five years.

Roman Basi is an attorney and CPA with the firm Basi, Basi & Associates at the Center for Financial, Legal & Tax Planning. He writes frequently on issues facing business owners. Ian C. Perry, an accountant with the firm, contributed to this article.