If you’re a foreign founder building a U.S. startup (or converting an LLC into a C-Corp), you may have heard about QSBS—the tax rule in IRC §1202 that can exclude some or all gain when you sell qualifying stock. The most common confusion is this:

“If my parent buys my founder shares (because my home country restricts outbound investment), can they gift the shares to me later without ruining QSBS?”

The answer is: a gift does not automatically ruin QSBS—but QSBS only works when the underlying stock and the structure satisfy the statute, and foreign founders often miss key traps.

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Quick definitions

QSBS = Qualified Small Business Stock

Stock of a U.S. C-Corporation that meets certain requirements. If you meet the rules, some or all of the gain on sale can be excluded under IRC §1202.

Original issue requirement

Generally, QSBS must be acquired directly from the company at issuance (not bought from another shareholder), in exchange for money, property, or services.

Why foreign founders care

Even if you’re non-U.S. today, you might later become a U.S. tax resident (move to the U.S., get a green card, etc.) when an exit happens—and then §1202 can become a huge issue.

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FAQ 1 — What are the core QSBS requirements in simple terms?

To even start the QSBS analysis, the stock generally must meet these basics:

• The issuer must be a U.S. C-Corporation.
• You (or a qualifying transferor) must acquire the stock at original issuance (directly from the company) for money/property/services.
• Gross assets test: the corporation must be under the statutory asset ceiling before and immediately after the issuance (and there’s now an inflation concept in the statute).
• Active business test: generally, at least 80% of the corporation’s assets must be used in the active conduct of a qualified trade or business.
• Excluded businesses: many “services” businesses do not qualify (e.g., law, accounting, consulting, health, finance, etc.).

Common foreign-founder mistake: assuming “it’s a U.S. company, so it must be QSBS.” In reality, industry type and facts matter a lot.

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FAQ 2 — Did QSBS rules change recently (holding period, limits, asset threshold)?

Yes. The statute now includes different rules depending on whether stock was acquired on or before a defined “applicable date” tied to the enactment of the latest amendments.

Key changes reflected in the current U.S. Code text include:

• A 3-year holding period for the partial exclusion regime for stock acquired after the applicable date (and more than 5 years for stock acquired on or before that date).
• A higher per-issuer gain exclusion cap for newer stock (and lower caps for older stock).
• A higher gross-assets ceiling shown in the statute (and related adjustments).

Because §1202 is extremely date-sensitive, you should treat “when was the stock acquired?” as a first-order question.

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FAQ 3 — If my parent buys the shares and later gifts them to me, does that automatically destroy QSBS?

No—gift transfers are expressly addressed in §1202.

Under IRC §1202(h), a transferee receiving QSBS via a qualifying transfer (including a gift) is generally treated as:

• having acquired the stock in the same manner as the transferor, and
• having held the stock for the transferor’s prior holding period (i.e., holding period “tacks”).

So if your parent acquired the stock at original issuance and it was QSBS in your parent’s hands, a later gift to you can carry over QSBS “character” and holding period, assuming all other requirements are met.

Important nuance

This rule does not magically turn non-QSBS stock into QSBS. If the stock was never QSBS to begin with, the gift rule won’t fix it.

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FAQ 4 — What’s the cleanest structure if foreign exchange rules prevent me from buying founder shares directly?

A commonly clean approach (U.S. tax conceptually) is:

• Parent gifts cash to the founder, and
• Founder uses that cash to purchase stock directly from the corporation at issuance (money → corporation; stock → founder).

This keeps the founder as the original subscriber (strongest §1202 posture) while still reflecting family funding.

Whether this is allowed under your home-country outbound investment rules (India/other jurisdictions)—you need local counsel for that part.

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FAQ 5 — Does a gift trigger U.S. gift tax reporting?

It depends on the donor’s U.S. tax status.

If the donor is a U.S. citizen or U.S. tax resident

U.S. gift tax can apply, and the donor may need gift tax reporting depending on amounts and exclusions.

If the donor is a nonresident, non-citizen

The IRS explains that nonresident non-citizens generally face U.S. gift tax on transfers of U.S.-situated real estate and tangible property, and notes limited circumstances where certain intangibles may also be implicated.

Because cross-border gift tax rules are detail-heavy, don’t assume “no filing” without confirming donor residency status and the type of property transferred.

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FAQ 6 — What if I buy stock from my parent (or any shareholder) instead of receiving it as a gift?

Buying stock from another shareholder is usually a secondary purchase, and §1202 generally requires acquisition at original issuance.

There are special carryover concepts for certain tax-free formations and reorganizations (e.g., §351 / §368), but those are not “simple purchases,” and the limitations matter.

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FAQ 7 — Can I hold QSBS through an LLC, partnership, or S-Corp?

Sometimes, yes—but there are strict rules.

Under the pass-through rules in §1202(g), an owner can potentially claim §1202 benefits on their share of gain if, among other requirements:

• the entity held QSBS for the required holding period, and
• the owner held their interest in the pass-through on the date the entity acquired the QSBS and continuously thereafter until sale.

This is an area where people accidentally break QSBS by changing ownership percentages or adding investors in the wrong way.

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FAQ 8 — Does vesting (restricted founder stock) affect the QSBS holding period?

Often, yes. If your founder stock is subject to vesting restrictions, timing and elections can affect when you’re treated as owning the stock for tax purposes. That can flow into the §1202 holding period analysis.

This is where 83(b) planning often shows up for startups—but it must be handled carefully and timely.

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FAQ 9 — What’s the biggest “hidden” QSBS problem for foreign founders?

Two big ones:

• The company’s business may be excluded (many service businesses do not qualify).
• Bad issuance / cap table hygiene (stock not actually issued properly, stock issued after assets exceed limits, redemptions, restructurings, etc.).

QSBS is not something you “elect” at the end—you usually win or lose QSBS based on what you did years earlier.

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FAQ 10 — What should I document now so you’re not guessing later?

If you want an audit-defensible QSBS file, keep:

• Formation and conversion documents (LLC → C-Corp, if applicable)
• Stock purchase agreements / subscription docs
• Board consents and cap table history
• Proof of what was exchanged for stock (cash, property, services)
• Financials showing gross assets around issuance events

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Bottom line

Gifting stock does not automatically disqualify QSBS—§1202 specifically provides transfer rules that can preserve QSBS status and holding period for gifts.

The real question is whether the stock is QSBS in the first place and whether the issuance/holding structure satisfies §1202’s technical requirements (business type, asset thresholds, holding period, and how the stock was acquired).

Cross-border exchange controls (like India’s ODI/RSU/foreign investment limits) are separate from U.S. QSBS rules—coordinate both.

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If you want a written, citation-backed QSBS memo (and a clean step plan for family funding, gifting, and issuance so you don’t accidentally blow §1202), book a paid consult here:

https://oandgaccounting.com/appointment-booking-form/