Manoj Viswanathan (UC Law SF), Toward Issuer-Based Certification of Qualified Small Business Stock, 191 Tax Notes Fed. 369 (Apr. 20, 2026):
The qualified small business stock (QSBS) exclusion under section 1202 allows shareholders of certain startups to exclude from income tax the greater of $10 million ($15 million for stock acquired after July 4, 2025) or 10 times their adjusted basis in the stock. As I and others have previously argued, section 1202 represents poor tax policy: It delivers its largest benefits to high-income taxpayers, diverges from its stated rationale of helping small businesses, and likely costs far more than anticipated.
Full repeal would be the most appropriate policy response. But while the QSBS exclusion remains in effect — and indeed, was significantly expanded by the One Big Beautiful Bill Act (P.L. 119-21) in July 2025 — Congress should pursue incremental reforms to curb abuse and improve administration. This article proposes one particular reform: shifting the burden of establishing QSBS eligibility from individual shareholders to the issuing corporations. To the extent that the QSBS exclusion has any redeeming tax policy functions, they would be improved by a QSBS issuer-based reporting regime.
Under current practice, a shareholder claims the section 1202 exclusion simply by reporting the gain on Form 8949, “Sales and Other Dispositions of Capital Assets,” with a “Q” code in column (f). No certification from the issuing corporation is required. Yet many key eligibility criteria — for example, whether the corporation’s gross assets were below the statutory threshold at issuance, whether the corporation was engaged in a qualifying active trade or business, and whether disqualifying stock redemptions occurred — are almost entirely within the exclusive knowledge of the corporation, not the shareholder. This structure creates enforcement challenges and invites aggressive and erroneous claims.
This article argues that Treasury (and Congress, as applicable) should require corporations issuing QSBS to (1) certify eligibility as a condition of QSBS status at the time of issuance via a new Form 1099-QSBS, and (2) report annually whether that status is maintained. It also argues in favor of a mandatory reporting regime for practical and normative reasons and thereby goes beyond existing commentary. In contrast to Andrew Gradman’s thoughtful 2023 proposal calling for a certificate that corporations could optionally provide to shareholders, this article argues that optional approaches are inadequate given the extent to which investors and the IRS would benefit from issuer-based reporting.
As a practical matter, issuer-based certification places compliance responsibility with the party best positioned to satisfy it. Corporations already possess the information necessary to assess QSBS eligibility, and they typically evaluate these issues at the time of issuance, when the relevant facts are readily available. Shareholders, by contrast, often must reconstruct those facts years later — sometimes after the corporation has changed substantially or no longer exists. Centralizing certification at the issuer level thus reduces duplicative diligence, limits error, and allows the IRS to verify eligibility through a single, contemporaneous reporting channel rather than through fragmented, after-the-fact audits of individual taxpayers.
Issuer-based reporting also reinforces the normative justification for the QSBS exclusion. If neither the corporation nor the investor was aware of section 1202 at the time of investment, the exclusion did nothing to catalyze that investment, and the resulting tax benefit is a pure windfall. Mandatory corporate certification thus operates as a screening mechanism: A corporation that must certify QSBS eligibility has necessarily evaluated its status, and a rational issuer will convey that status to prospective investors because it enhances the attractiveness of the investment.
The OBBBA’s expansion of section 1202 makes the proposals suggested in this article even more urgent. The OBBBA raised the gross assets threshold from $50 million to $75 million, increased the per-issuer exclusion cap from $10 million to $15 million, and introduced a tiered holding period with partial exclusions beginning at three years. These changes will bring more companies and more shareholders into the QSBS regime. The act also created a dual-track system (pre-July 4, 2025, stock remains subject to the old rules while post-July 4 stock follows the new rules) that makes recordkeeping significantly more complex. Yet the OBBBA added no reporting or certification requirements whatsoever. This is a significant gap that this article seeks to fill.
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