A Guide to QSBS

At a Glance

• Qualified Small Business Stock (QSBS) is a federal tax incentive that can allow eligible investors to exclude a significant portion of capital gains on qualifying startup stock.

• To qualify, stock must be issued by a U.S. C-corporation that meets an aggregate gross asset test (now generally up to $75 million for stock issued on or after July 4, 2025) and operate in a permitted line of business.

• For QSBS acquired on or after July 4, 2025, a new tiered regime allows 50% exclusion after 3 years, 75% after 4 years, and 100% after 5 years, subject to a per-issuer cap that has increased to $15 million or 10x basis, whichever is greater.

• SPVs formed as pass-through entities can transmit QSBS benefits to investors, but only if strict requirements are met, including original-issue acquisition and continuous ownership of the SPV interest from the time the SPV acquires the stock.

• State-level treatment is not uniform. Several states, including California, Pennsylvania, Mississippi, and Alabama, do not conform to the federal QSBS exclusion, and New Jersey only conforms beginning in 2026.

• Sydecar makes it simple and efficient for venture fund and syndicate managers to form SPVs and funds by automating banking, compliance, contracts, and reporting. Our standardized SPV structures are designed to support original-issue equity purchases, which is foundational for capturing potential QSBS benefits.

Why QSBS Matters for Venture and SPV Investors

There are many factors to weigh when investing in startups: sector, market, stage, geography, and founder quality, to name a few. For U.S. investors, one more dimension matters: whether an investment may qualify for Qualified Small Business Stock (QSBS) treatment under Internal Revenue Code Section 1202.

QSBS treatment can provide substantial tax savings for founders, early employees, angels, and SPV investors. However, the rules are technical and have changed recently, particularly for stock issued on or after July 4, 2025. Understanding the basics helps managers and LPs structure investments thoughtfully and know when to bring in specialized tax counsel.

What Is QSBS?

QSBS is stock in a “qualified small business” (QSB) that meets a set of statutory conditions. At a high level:

• The issuer must be a domestic C-corporation.

• The stock must be acquired at original issue (directly from the company) in exchange for cash, property (other than stock), or services.

• The corporation’s aggregate gross assets must not exceed a specified cap immediately before and after the issuance:

  • For stock issued before July 4, 2025: generally $50 million.

  • For stock issued on or after July 4, 2025: $75 million, with inflation adjustments beginning in 2027.

• During substantially all of the holding period, at least 80% of the corporation’s assets (by value) must be used in one or more qualified trades or businesses, and the company must not fall into an excluded category.

Excluded business categories

Section 1202 excludes certain trades and businesses, including:

• Performance of services in fields such as health, law, engineering, architecture, accounting, actuarial science, performing arts, consulting, athletics, financial services, or brokerage services

• Banking, insurance, financing, leasing, investing, or similar businesses

• Farming and certain natural resource extraction activities

• Operation of hotels, motels, restaurants, or similar businesses

• Any business where the principal asset is the reputation or skill of one or more employees

Most software and SaaS companies that build and sell products rather than providing primarily excluded professional services can qualify, but the “active business” test and service-business carve-outs are fact-specific and should be vetted with tax advisors.

How QSBS Works After the 2025 Law Changes

For federal income tax purposes, Section 1202 allows eligible taxpayers to exclude a portion of gain when they sell QSBS that they have held for a sufficient period.

Two sets of rules now apply, depending on when the stock was acquired:

1. QSBS acquired before July 4, 2025

Pre-OBBBA law continues to apply. In many common scenarios (for example, stock acquired after September 27, 2010), up to 100% of eligible gain can be excluded after a 5-year holding period, subject to a per-issuer cap of:

• The greater of $10 million of gain, or

• 10x the taxpayer’s basis in the stock.

Different percentage exclusions apply for older QSBS acquired in the 1990s and 2000s, but those situations are less common for emerging managers.

2. QSBS acquired on or after July 4, 2025

The One Big Beautiful Bill Act (OBBBA) introduced a more flexible, tiered system for new QSBS:

• After 3 years of holding: up to 50% of eligible gain may be excluded.

• After 4 years: up to 75% of eligible gain may be excluded.

• After 5 years or more: up to 100% of eligible gain may still be excluded.

For this post-July 4, 2025 QSBS, the per-issuer cap has increased to:

• The greater of $15 million of gain, or

• 10x the taxpayer’s basis, with inflation adjustments starting in 2027.

The older $10 million per-issuer cap continues to apply to QSBS acquired before July 4, 2025, even if the sale occurs after that date.

Because the interaction of acquisition dates, holding periods, and caps can be complex, investors should work closely with tax counsel when planning exits.

How Does QSBS Apply to SPV Investments?

Most SPVs that invest via Sydecar are formed as LLCs taxed as partnerships, which are pass-through entities for tax purposes. That structure can allow QSBS benefits to flow through to individual investors, subject to important limitations.

When a partnership or LLC taxed as a partnership sells QSBS after satisfying the holding period, non-corporate partners may claim Section 1202 gain exclusion on their share of the gain if:

1. The underlying stock itself qualifies as QSBS.

2. The partner was an owner of the SPV on the date the SPV acquired the QSBS.

3. The partner has held the SPV interest continuously from that acquisition date through the date the SPV disposes of the stock.

4. The partner is an eligible taxpayer (for example, not a C-corporation) and otherwise meets Section 1202 requirements.

In addition, the amount of gain that a partner can exclude is limited to the portion that is “determined by reference to the interest the taxpayer held in the pass-through entity on the date the stock was acquired.”

In practical terms, this means:

• If an investor joins the SPV after the SPV has already acquired the company’s stock, that investor generally cannot claim QSBS exclusion on gain from that stock.

• If an investor increases their SPV ownership after the acquisition date, the exclusion usually does not apply to the portion of gain attributable to the increased interest.

Sydecar structures SPVs as pass-through entities that purchase equity directly from portfolio companies at original issue, which is a core requirement for QSBS eligibility when all other conditions are met. Managers still need to coordinate with counsel to confirm QSBS status and to track which investors were in the vehicle at acquisition.

How Do I Know if My SPV Investment Qualifies as QSBS?

Determining whether an SPV investment is eligible for QSBS treatment requires both company-level and investor-level analysis.

Key questions include:

At the company level:

• Is the issuer a U.S. C-corporation (not an LLC taxed as a partnership or an S-corporation)?

• Did the corporation meet the aggregate gross asset test at issuance (≤ $50 million for pre-July 4, 2025 stock, or ≤ $75 million for post-July 4, 2025 stock)?

• Does the company use at least 80% of its assets in a qualified trade or business, and avoid the excluded industries?

• Did the SPV buy original issue stock, rather than secondary shares?

Companies often confirm QSBS status in connection with financings or 409A valuations, but there is no single required form. Investors usually need representations from company counsel.

At the SPV and investor level:

• Is the SPV an LLC taxed as a partnership (or other pass-through)?

• Did you hold your SPV interest on the date the SPV acquired the QSBS, and at all times thereafter until sale?

• Are you an eligible taxpayer (for example, an individual, trust, or certain pass-through entities, but not a C-corporation)?

Because these tests are fact-specific, it is best practice for managers to:

• Collect and retain company-level QSBS representations.

• Track which investors were in each SPV at the moment of acquisition.

• Encourage investors to seek tailored tax advice before relying on Section 1202.

SAFEs, Convertible Notes, and QSBS

Many early-stage investments are structured as SAFEs or convertible notes. For QSBS purposes, only stock counts. The law and guidance make clear that:

• The Section 1202 holding period generally starts when a taxpayer is treated as owning stock, not merely a contract that may convert into stock later.

• The IRS has not issued definitive guidance treating SAFEs themselves as stock for Section 1202 purposes. Several leading tax commentators note that SAFEs can be tricky and often require case-by-case analysis.

In practice, many advisors assume that the QSBS holding period starts at the time a SAFE or note converts into equity, unless there is a strong basis to treat the instrument as stock from inception. Investors who care about QSBS should review instruments and transaction timelines with experienced tax counsel.

What Are the Tax Benefits of QSBS?

When all requirements are satisfied, QSBS can significantly reduce federal tax on qualifying gains:

• For QSBS acquired before July 4, 2025, an investor may be able to exclude up to 100% of gain after a 5-year holding period (subject to the $10 million or 10x basis cap and legacy percentage rules for older stock).

• For QSBS acquired on or after July 4, 2025, investors can now access exclusion earlier (50% after 3 years, 75% after 4 years, 100% after 5 years), with a higher per-issuer cap of $15 million or 10x basis for eligible stock.

In both regimes, gain above the applicable caps remains taxable, and other federal rules (for example, the alternative minimum tax) and state tax rules may apply.

Secondary Sales of SPV Interests and QSBS

The treatment of secondary transactions involving SPVs is often misunderstood.

• Selling your interest in an SPV is generally not the same as selling QSBS stock. Section 1202 applies to gain from the sale of stock, not typically from the sale of a partnership interest.

• A buyer who acquires an SPV interest after the SPV has already purchased QSBS usually does not meet the requirement of having held an interest in the SPV from the date of acquisition of the stock and therefore cannot claim the QSBS exclusion on that stock’s future sale.

There are narrow exceptions in the Code and regulations for certain transfers (for example, gifts, transfers at death, and some tax-free reorganizations), but standard secondary SPV trades will not usually preserve Section 1202 benefits for the seller or create them for the buyer. Investors should assume QSBS treatment does not apply to typical secondary SPV transfers unless a qualified tax advisor advises otherwise.

State-Level QSBS Treatment

QSBS is a federal tax provision, but states decide independently whether to conform.

As of late 2025:

• California, Pennsylvania, Mississippi, and Alabama do not conform to the federal QSBS exclusion. Gains that are excluded federally are still fully taxable for state income tax purposes in these jurisdictions.

• New Jersey previously did not conform but has enacted legislation to conform to Section 1202 for tax years beginning on or after January 1, 2026, subject to specific limitations and timing rules.

• Other jurisdictions, including some territories, have their own approaches and may not fully mirror federal law.

Because this landscape changes, investors should confirm state-specific treatment with their advisors, particularly if they are residents of non-conforming or partial-conformity states.

How Sydecar Supports QSBS-Friendly Structures

Sydecar makes it simple and efficient for venture fund and syndicate managers to form SPVs and funds by automating banking, compliance, contracts, and reporting. Our infrastructure is designed to:

• Form SPVs as pass-through entities that acquire original issue equity directly from portfolio companies.

• Standardize documentation and workflows across deals, making it easier to track key eligibility factors like acquisition dates, entity type, and capital structure.

• Produce clear investor reporting, including tax documentation, that supports downstream QSBS analysis.

Sydecar does not provide tax advice or certify QSBS status, but our infrastructure reduces operational friction so that managers and their advisors can focus on structuring deals thoughtfully.

If you want to design an SPV program that preserves the potential to capture QSBS benefits while keeping operations simple, book a demo with our team to see how our platform supports deal-by-deal investing at scale.