Section 1202, read closely.

What Section 1202 is

Congress wrote Section 1202 to reward patient capital in young American companies. Hold qualified stock long enough, sell it, and some or all of the gain may be excluded from federal tax. For a founder approaching an exit, it is the question most often asked too late. Qualification is not elected on a return. It is a set of facts: what the company was, how the stock was issued, and how long it was held.

Two regimes, divided by a date

The One Big Beautiful Bill Act, signed July 4, 2025, split Section 1202 in two. Which rules apply depends on when the stock was acquired, not when it is sold.

What both regimes require

Certain conditions did not change, and each is tested on the facts.

• A domestic C corporation, at issuance and for substantially all of the holding period.
• Original issuance. The stock must come directly from the company, in exchange for money, property other than stock, or services. Stock bought from another shareholder does not qualify.
• An active business. At least 80 percent of the company's assets must be used in a qualified trade or business. Most professional services, finance, insurance, farming, extraction, hotels, and restaurants are excluded.
• Redemption discipline. Company buybacks near the issuance date can disqualify the stock, sometimes for every shareholder.
• Proof. The burden rests with the taxpayer. The exclusion is claimed with records, not recollection.

The cap, read carefully

The cap is the greater of the flat amount or ten times basis, per issuer, per taxpayer. Founders with near-zero basis look to the flat limb. Where meaningful basis exists, for instance property contributed at appreciated value, the ten-times limb can extend well beyond it. Because the cap runs per taxpayer, it also opens the estate planning questions we take up on the following page.

When the clock starts

The holding period is measured in days, and its start date is a matter of record.

• Straight issuance. The clock starts when the stock is issued.
• Restricted stock. Without a Section 83(b) election filed within 30 days of grant, the holding period may not begin until the shares vest, years later.
• Former LLCs. Conversion to a C corporation starts the clock at conversion, not at founding. Years operated as an LLC do not count.

Where founders lose the exclusion

The recurring mistakes are structural, made early, and quiet until diligence.

• A late conversion. Every year spent as an LLC is a year the clock has not started.
• An S election. Stock issued while an S election is in effect cannot qualify, and a later revocation does not cure it.
• A disqualifying redemption. A routine buyback of a departing co-founder's shares can taint issuances around it.
• A missed 83(b). Thirty days, no extensions.
• Thin records. No attestation letter from the company, no gross-asset documentation at issuance, no file to hand an acquirer's counsel.
• Selling early. Months, sometimes weeks, short of the applicable threshold, without considering a Section 1045 rollover.

Before the term sheet, not after

By the time an offer arrives, most of these questions have already been answered by the company's history. What remains is sequencing: confirming eligibility, assembling the documentary record, weighing a 1045 rollover if the clock is short, and coordinating the estate work that must precede a letter of intent. This is why Muse engages 12 to 18 months before a liquidity event. Your counsel drafts, your CPAs file and verify the figures. Muse sits between them, holding the calendar, so that when the papers arrive there is nothing left to decide, only a record to produce.