§1202 — Partial exclusion for gain from certain small business stock

except as provided in paragraphs (3) and (4), 50 percent of any gain from the sale or exchange of qualified small business stock acquired on or before the applicable date and held for more than 5 years, and

the applicable percentage of any gain from the sale or exchange of qualified small business stock acquired after the applicable date and held for at least 3 years.

In the case of qualified small business stock acquired after the date of the enactment of this paragraph in a corporation which is a qualified business entity (as defined in section 1397C(b)) during substantially all of the taxpayer’s holding period for such stock, paragraph (1) shall be applied by substituting “60 percent” for “50 percent”.

Rules similar to the rules of paragraphs (5) and (7) of section 1400B(b) (as in effect before its repeal) shall apply for purposes of this paragraph.

Subparagraph (A) shall not apply to gain attributable to periods after December 31, 2018.

The District of Columbia Enterprise Zone shall not be treated as an empowerment zone for purposes of this paragraph.

paragraph (1)(A) shall be applied by substituting “75 percent” for “50 percent”, and

paragraph (2) shall not apply.

paragraph (1)(A) shall be applied by substituting “100 percent” for “50 percent”,

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1 So in original. The comma probably should be followed by “and”.

paragraph (2) shall not apply.

The term “applicable date” means the date of the enactment of this paragraph.

In the case of any stock which would (but for this paragraph) be treated as having been acquired before, on, or after the applicable date, whichever is applicable, the acquisition date for purposes of this section shall be the first day on which such stock was held by the taxpayer determined after the application of section 1223.

the applicable dollar limit for the taxable year, or

10 times the aggregate adjusted bases of qualified small business stock issued by such corporation and disposed of by the taxpayer during the taxable year.

In the case of a separate return by a married individual for any taxable year—

In the case of any joint return, the amount of gain taken into account under subsection (a) shall be allocated equally between the spouses for purposes of applying this subsection to subsequent taxable years.

For purposes of this subsection, marital status shall be determined under section 7703.

if such stock was acquired by the taxpayer on or before the applicable date, $10,000,000, reduced by the aggregate amount of eligible gain taken into account by the taxpayer under subsection (a) for prior taxable years and attributable to dispositions of stock issued by such corporation and acquired by the taxpayer before, on, or after the applicable date, and

if such stock was acquired by the taxpayer after the applicable date, $15,000,000, reduced by the sum of—

In the case of any taxable year beginning after 2026, the $15,000,000 amount in paragraph (4)(B) shall be increased by an amount equal to—

If any increase under this subparagraph is not a multiple of $10,000, such increase shall be rounded to the nearest multiple of $10,000.

If, for any taxable year, the eligible gain attributable to dispositions of stock issued by a corporation and acquired by the taxpayer after the applicable date exceeds the applicable dollar limit, then notwithstanding any increase under subparagraph (A) for any subsequent taxable year, the applicable dollar limit for such subsequent taxable year shall be zero.

such dollar amount, multiplied by

the cost-of-living adjustment determined under section 1(f)(3) for the calendar year in which the taxable year begins, determined by substituting “calendar year 2025” for “calendar year 2016” in subparagraph (A)(ii) thereof.

as of the date of issuance, such corporation is a qualified small business, and

except as provided in subsections (f) and (h), such stock is acquired by the taxpayer at its original issue (directly or through an underwriter)—

Stock in a corporation shall not be treated as qualified small business stock unless, during substantially all of the taxpayer’s holding period for such stock, such corporation meets the active business requirements of subsection (e) and such corporation is a C corporation.

Stock acquired by the taxpayer shall not be treated as qualified small business stock if, at any time during the 4-year period beginning on the date 2 years before the issuance of such stock, the corporation issuing such stock purchased (directly or indirectly) any of its stock from the taxpayer or from a person related (within the meaning of section 267(b) or 707(b)) to the taxpayer.

Stock issued by a corporation shall not be treated as qualified business stock if, during the 2-year period beginning on the date 1 year before the issuance of such stock, such corporation made 1 or more purchases of its stock with an aggregate value (as of the time of the respective purchases) exceeding 5 percent of the aggregate value of all of its stock as of the beginning of such 2-year period.

If any transaction is treated under section 304(a) as a distribution in redemption of the stock of any corporation, for purposes of subparagraphs (A) and (B), such corporation shall be treated as purchasing an amount of its stock equal to the amount treated as such a distribution under section 304(a).

the aggregate gross assets of such corporation (or any predecessor thereof) at all times on or after the date of the enactment of the Revenue Reconciliation Act of 1993 and before the issuance did not exceed $75,000,000,

the aggregate gross assets of such corporation immediately after the issuance (determined by taking into account amounts received in the issuance) do not exceed $75,000,000, and

such corporation agrees to submit such reports to the Secretary and to shareholders as the Secretary may require to carry out the purposes of this section.

For purposes of paragraph (1), the term “aggregate gross assets” means the amount of cash and the aggregate adjusted bases of other property held by the corporation.

For purposes of subparagraph (A), the adjusted basis of any property contributed to the corporation (or other property with a basis determined in whole or in part by reference to the adjusted basis of property so contributed) shall be determined as if the basis of the property contributed to the corporation (immediately after such contribution) were equal to its fair market value as of the time of such contribution.

All corporations which are members of the same parent-subsidiary controlled group shall be treated as 1 corporation for purposes of this subsection.

For purposes of subparagraph (A), the term “parent-subsidiary controlled group” means any controlled group of corporations as defined in section 1563(a)(1), except that—

at least 80 percent (by value) of the assets of such corporation are used by such corporation in the active conduct of 1 or more qualified trades or businesses, and

such corporation is an eligible corporation.

start-up activities described in section 195(c)(1)(A),

activities resulting in the payment or incurring of expenditures which are treated as foreign research or experimental expenditures under section 174 or domestic research or experimental expenditures under section 174A, or

activities with respect to in-house research expenses described in section 41(b)(4),

any trade or business involving the performance of services in the fields of health, law, engineering, architecture, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, or any trade or business where the principal asset of such trade or business is the reputation or skill of 1 or more of its 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 of a character with respect to which a deduction is allowable under section 613 or 613A, and

any business of operating a hotel, motel, restaurant, or similar business.

a DISC or former DISC,

a regulated investment company, real estate investment trust, or REMIC, and

a cooperative.

For purposes of this subsection, stock and debt in any subsidiary corporation shall be disregarded and the parent corporation shall be deemed to own its ratable share of the subsidiary’s assets, and to conduct its ratable share of the subsidiary’s activities.

A corporation shall be treated as failing to meet the requirements of paragraph (1) for any period during which more than 10 percent of the value of its assets (in excess of liabilities) consists of stock or securities in other corporations which are not subsidiaries of such corporation (other than assets described in paragraph (6)).

For purposes of this paragraph, a corporation shall be considered a subsidiary if the parent owns more than 50 percent of the combined voting power of all classes of stock entitled to vote, or more than 50 percent in value of all outstanding stock, of such corporation.

are held as a part of the reasonably required working capital needs of a qualified trade or business of the corporation, or

are held for investment and are reasonably expected to be used within 2 years to finance research and experimentation in a qualified trade or business or increases in working capital needs of a qualified trade or business,

such amount shall be treated as gain described in subsection (a), and

for purposes of applying subsection (b), such amount shall be treated as gain from a disposition of stock in the corporation issuing the stock disposed of by the pass-thru entity and the taxpayer’s proportionate share of the adjusted basis of the pass-thru entity in such stock shall be taken into account.

such amount is attributable to gain on the sale or exchange by the pass-thru entity of stock which is qualified small business stock in the hands of such entity (determined by treating such entity as an individual) and which was held by such entity for at least 3 years (more than 5 years in the case of stock acquired on or before the applicable date), and

such amount is includible in the gross income of the taxpayer by reason of the holding of an interest in such entity which was held by the taxpayer on the date on which such pass-thru entity acquired such stock and at all times thereafter before the disposition of such stock by such pass-thru entity.

any partnership,

any S corporation,

any regulated investment company, and

any common trust fund.

having acquired such stock in the same manner as the transferor, and

having held such stock during any continuous period immediately preceding the transfer during which it was held (or treated as held under this subsection) by the transferor.

by gift,

at death, or

from a partnership to a partner of stock with respect to which requirements similar to the requirements of subsection (g) are met at the time of the transfer (without regard to the 5-year holding period requirement).

In the case of a transaction described in section 351 or a reorganization described in section 368, if qualified small business stock is exchanged for other stock which would not qualify as qualified small business stock but for this subparagraph, such other stock shall be treated as qualified small business stock acquired on the date on which the exchanged stock was acquired.

This section shall apply to gain from the sale or exchange of stock treated as qualified small business stock by reason of subparagraph (A) only to the extent of the gain which would have been recognized at the time of the transfer described in subparagraph (A) if section 351 or 368 had not applied at such time. The preceding sentence shall not apply if the stock which is treated as qualified small business stock by reason of subparagraph (A) is issued by a corporation which (as of the time of the transfer described in subparagraph (A)) is a qualified small business.

For purposes of this paragraph, stock treated as qualified small business stock under subparagraph (A) shall be so treated for subsequent transactions or reorganizations, except that the limitation of subparagraph (B) shall be applied as of the time of the first transfer to which such limitation applied (determined after the application of the second sentence of subparagraph (B)).

In the case of a transaction described in section 351, this paragraph shall apply only if, immediately after the transaction, the corporation issuing the stock owns directly or indirectly stock representing control (within the meaning of section 368(c)) of the corporation whose stock was exchanged.

such stock shall be treated as having been acquired by the taxpayer on the date of such exchange, and

the basis of such stock in the hands of the taxpayer shall in no event be less than the fair market value of the property exchanged.

such stock was held by the taxpayer for at least 3 years (more than 5 years in the case of stock acquired on or before the applicable date) as of the first day on which there was such a short position, and

the taxpayer elects to recognize gain as if such stock were sold on such first day for its fair market value.

the taxpayer has made a short sale of substantially identical property,

the taxpayer has acquired an option to sell substantially identical property at a fixed price, or

to the extent provided in regulations, the taxpayer has entered into any other transaction which substantially reduces the risk of loss from holding such qualified small business stock.