Sell C Corp Stock Tax Free: Section 1202 Limits and Rollovers

You can sell C corp stock tax free at the federal level when the shares are Qualified Small Business Stock (QSBS) under Section 1202 of the Internal Revenue Code and you meet the holding period. For stock acquired after July 4, 2025, the exclusion reaches up to $15 million of gain per issuer; for stock acquired on or before that date, the cap is $10 million. If your stock doesn’t yet qualify, Section 1045 rollovers and Section 368 reorganizations can defer the tax on an exit until a later sale.

What Section 1202 Actually Excludes

Section 1202 lets an individual shareholder (and certain trusts and estates) exclude a percentage of the gain on a sale of QSBS from federal income tax. At the 100% tier, the excluded gain also escapes the 3.8% net investment income tax and the alternative minimum tax, which is what makes a qualifying sale genuinely tax-free rather than just mostly tax-free. Corporate shareholders cannot use the exclusion.¹

Two threshold rules govern who holds qualifying stock. The company must be a domestic C corporation, and you must have acquired the shares directly from the company at original issuance in exchange for cash, property (other than stock), or services. Buying shares from another shareholder on the secondary market does not count. Founders who receive equity as compensation and investors who write checks into a priced round both clear this rule; someone who buys out a departing co-founder does not.¹

What the Company Has to Look Like

The Gross Assets Ceiling

The corporation’s aggregate gross assets cannot exceed a specific dollar threshold, measured both before the stock issuance and immediately after. For stock issued after July 4, 2025, the ceiling is $75 million. For stock issued on or before that date, the older $50 million limit applies. Gross assets includes cash received in the issuance itself, so a company worth $60 million that raises $20 million pushes past $75 million once the new cash hits the balance sheet, disqualifying the shares issued in that round.¹

Active Business Use

At least 80% of the corporation’s assets, by value, must be actively used in a qualified trade or business for substantially all of the shareholder’s holding period. Holding companies and investment vehicles fail this test; the corporation has to be running a real operating business rather than sitting on a portfolio of stocks or rental property.¹

Industries That Can’t Issue QSBS

Section 1202 excludes a long list of industries no matter how small the company is:²

Professional services including health, law, engineering, architecture, accounting, actuarial science, performing arts, consulting, athletics, financial services, and brokerage, plus any business whose principal asset is the reputation or skill of its employees
Financial businesses including banking, insurance, financing, leasing, and investing
Farming, including raising or harvesting trees
Natural resource extraction such as mining, oil, and gas
Hotels, motels, restaurants, and similar hospitality businesses

The reputation-or-skill catchall reaches further than it looks. A consulting firm that rebrands as a technology company but still earns its revenue from the expertise of its founder can still be classified as a disqualified business. Software companies, manufacturers, retailers, and construction firms typically clear the industry test without difficulty.

How Long You Have to Hold, and How Much You Can Exclude

For stock acquired after July 4, 2025, the One Big Beautiful Bill Act created a tiered structure:

Three years held: 50% of the gain excluded
Four years held: 75% of the gain excluded
Five or more years held: 100% of the gain excluded

For stock acquired on or before July 4, 2025, the older rules still control. Stock acquired after September 27, 2010 gets a 100% exclusion after five years. Stock acquired between February 18, 2009 and September 27, 2010 gets 75%. Stock acquired on or before February 17, 2009 gets 50%.² There is no partial credit for selling early. One day short of the required holding period disqualifies the entire exclusion.

The exclusion is capped per issuer. For stock acquired after July 4, 2025, you can exclude up to $15 million of gain per company (with inflation adjustments starting after 2026). For older stock, the cap is $10 million. In either case, if 10 times your adjusted basis in the stock exceeds the dollar cap, you can use that larger number instead.¹

Each company you hold qualifying stock in has its own separate cap. Married couples filing jointly split the exclusion equally between spouses, so each spouse effectively gets a full cap. Married filing separately cuts the applicable dollar limit in half.¹

The Sale Has to Be a Stock Sale

Section 1202 applies only to gain from selling stock. If the corporation instead sells its assets and distributes the proceeds to shareholders, the exclusion does not apply, even if the underlying stock would otherwise qualify.¹ Buyers of small C corporations often prefer asset deals for the step-up in basis, while sellers with qualifying stock want a stock deal for the tax-free treatment. On a $15 million gain, the choice between the two structures can easily change the federal tax bill by $3 million or more.

Rolling Gain Into New QSBS Under Section 1045

If you haven’t held your stock long enough for a Section 1202 exclusion, Section 1045 lets you defer the gain by rolling the proceeds into new qualifying stock. You must have held the original stock for more than six months, and you must reinvest in new QSBS within 60 days of the sale.³

This is a deferral, not a permanent exclusion. Your basis in the replacement stock is reduced by the gain you deferred, so the gain resurfaces when you eventually sell the replacement stock. The usual play is to roll into new QSBS, hold it long enough to satisfy the Section 1202 holding period, and then claim the full exclusion on the eventual sale. Miss the 60-day reinvestment window and the gain is taxable at standard capital gains rates with no second chance. Only individuals can make the election, and it is made on the tax return for the year of the original sale.

When the Buyer Pays in Stock: Section 368 Reorganizations

If your company is acquired by another corporation and you receive the acquirer’s stock instead of cash, the deal can sometimes be structured as a tax-free reorganization under Section 368. No gain is recognized at the exchange because your investment continues in modified corporate form.⁴

A meaningful portion of the total consideration has to be stock, a principle called continuity of interest. The commonly accepted threshold is roughly 40% stock consideration, although the IRS historically looked for at least 50% in ruling requests. An all-cash deal does not qualify. Any portion paid in cash, debt, or other non-stock property (called boot) is taxable to the extent you have a gain on it, and Section 356 caps the recognized gain on boot at your total gain in the transaction.⁵ Your basis in the old shares carries over to the new ones, so this is a deferral. Tax comes due whenever you sell the acquirer’s stock for cash.

If the original stock qualified as QSBS before the reorganization, Section 1202(h)(4) allows the replacement stock to be treated as QSBS as well, preserving your path to the Section 1202 exclusion on a future sale.¹

Gifts and Inheritance

QSBS status survives gifts and transfers at death. The recipient steps into your shoes, treated as having acquired the stock the same way you did and as having held it for the time you held it. A family member who receives stock you already held for four years only needs to hold it one more year (under the legacy five-year rules) to reach the full exclusion.¹

Because each recipient gets a separate per-issuer cap, gifting QSBS across a family can multiply the amount of tax-free gain available. A couple who gifts stock to three adult children can shelter far more gain across all the resulting returns than they could on their own.

Contributing QSBS to a partnership generally destroys the qualifying status, because the partnership was not the original issuee. A distribution from a partnership back to a partner can preserve status, but only if that partner held the partnership interest when the QSBS was originally acquired. Transfers to a single-member LLC treated as a disregarded entity are safe as long as the LLC doesn’t elect corporate treatment or add a second member.

AMT and Net Investment Income Tax by Tier

Gain qualifying for the 100% exclusion is fully exempt from both the alternative minimum tax and the 3.8% net investment income tax. That is what makes the top tier genuinely tax-free at the federal level.

The 50% and 75% tiers are treated less generously. Seven percent of the excluded gain is an AMT preference item, which can trigger AMT liability on large sales. The portion of gain that isn’t excluded is taxed at a special 28% rate rather than the usual 20% long-term capital gains rate, and it is also subject to the 3.8% net investment income tax.² For most sellers today, the 100% exclusion applies to stock acquired after September 27, 2010 and held for five or more years, so AMT and NIIT are concerns mainly for holders of older stock or those selling new stock after just three or four years under the tiered structure.

State Tax Is a Separate Question

Section 1202 is a federal provision. Several states, including California, Pennsylvania, New Jersey, Mississippi, Alabama, and Hawaii, do not conform to it. Shareholders in those states owe state capital gains tax on the full gain regardless of the federal exclusion. California is the most consequential: a founder selling $10 million of qualifying stock pays zero federal tax but could owe over $1 million to California. Most other states either follow the federal exclusion automatically or offer their own partial conformity. Check your state’s treatment before assuming a sale is entirely tax-free.

Reporting the Sale and Keeping the Records

You report a QSBS sale on IRS Form 8949 and carry the totals to Schedule D. Enter Code Q in the adjustments column to claim the Section 1202 exclusion, and enter the excluded amount as a negative number in the gain column. For Section 1045 rollovers, use Code R and enter the deferred gain as a negative the same way.⁶

Substantiating the exclusion takes records most shareholders don’t think to keep until it is too late. Hold onto original stock purchase agreements showing the date and method of acquisition, financial statements from the issuance date proving the corporation met the gross asset threshold, and business records (payroll filings, operational reports, asset inventories) showing the company satisfied the active business test throughout your holding period. If the IRS audits the exclusion, disorganized records are the fastest way to lose an otherwise legitimate claim. For reorganizations, track both the original acquisition date and the original cost basis of your old shares, because those numbers follow the replacement stock until you eventually sell it in a taxable transaction.

1
Office of the Law Revision Counsel. 26 USC 1202 – Partial Exclusion for Gain from Certain Small Business Stock
2
Office of the Law Revision Counsel. 26 U.S. Code 1202 – Partial Exclusion for Gain from Certain Small Business Stock
3
Office of the Law Revision Counsel. 26 U.S. Code 1045 – Rollover of Gain from Qualified Small Business Stock to Another Qualified Small Business Stock
4
Office of the Law Revision Counsel. 26 U.S. Code 368 – Definitions Relating to Corporate Reorganizations
5
Office of the Law Revision Counsel. 26 USC 356 – Receipt of Additional Consideration
6
Internal Revenue Service. 2025 Instructions for Form 8949