Last checked 1 November 2026. Section 1202 has many conditions, and the IRS has not published guidance on how bitcoin held by a company affects them. This page sets out the statute and the questions it raises. Your tax adviser decides how it applies to your shares. If anything here conflicts with the linked source, the source wins.
Qualified small business stock (QSBS) under section 1202 of the Internal Revenue Code lets a non corporate shareholder exclude some or all of the gain on selling shares in a qualifying C corporation. For founders and early investors, the exclusion can be worth far more than anything the company's bitcoin earns. That is why it matters: a large bitcoin holding could affect whether the company meets the conditions, and the risk falls on the shareholders.
The short version
- QSBS applies to shares originally issued by a domestic C corporation, held by individuals and other non corporate holders.
- For stock acquired after 4 July 2025, the exclusion is 50% after 3 years, 75% after 4 and 100% after 5.
- The company must use at least 80% of its assets, by value, in an active qualified business, and some businesses, including investing, are excluded.
- Bitcoin is not mentioned in section 1202. How it counts in these tests is uncertain. Ask your tax adviser before the holding grows large.
The main conditions in section 1202
| Condition | What the statute says | Why bitcoin may matter |
|---|---|---|
| Exclusion and holding period | For stock acquired after the applicable date (4 July 2025, the date that rule was enacted) and held at least 3 years: 50% at 3 years, 75% at 4 years, 100% at 5 years or more. Earlier stock follows earlier rules, with a holding period of more than 5 years. | No direct effect, but the other tests must be met during substantially all of the holding period. |
| Cap per issuer | Generally the greater of $15 million for stock acquired after the applicable date, reduced by gains already excluded, or 10 times the holder's basis in stock sold that year. | No direct effect. |
| Gross assets | Aggregate gross assets of the corporation must not exceed $75 million, indexed for inflation after 2026, at all times before and immediately after the stock is issued. Gross assets means cash plus the adjusted bases of other property. | Bitcoin bought by the company counts at its basis. Bitcoin contributed by a shareholder counts at fair value when contributed. |
| Active business: 80% test | At least 80% of assets, by value, must be used in the active conduct of one or more qualified trades or businesses during substantially all of the holding period. | Bitcoin held as treasury is unlikely to be used in the active conduct of a business. A large holding could push the company below 80%. This is our reading. |
| Working capital | Assets held to meet reasonable working capital needs, or held for investment and expected to be used within 2 years for research or working capital, count as used in the business. After the corporation has existed for 2 years, no more than 50% of assets may qualify this way. | Whether bitcoin held as a reserve could count is not addressed by the statute or IRS guidance. Check with your adviser. |
| Excluded businesses | Excluded fields include financial services, brokerage, banking, investing and similar businesses, among others. | A company whose main activity becomes holding bitcoin may risk being seen as an investing business. This is our reading. |
| Portfolio stock and securities | The corporation fails the active business test for any period in which more than 10% of the value of its assets, in excess of liabilities, is stock or securities in other corporations that are not its subsidiaries. | Bitcoin is not stock in a corporation, so on our reading this limit does not apply to it directly. It still counts against the 80% test above. Check with your adviser. |
Our judgement, not a rule: for a company where QSBS matters to the shareholders, the safest approach is to keep any bitcoin holding small relative to the operating business, set a cap in the treasury policy with QSBS in mind, and get written tax advice before the first purchase. Record the advice in the board paper.
Questions to ask your tax adviser
- Is our stock likely to be QSBS today, and from what date?
- How would a bitcoin holding of the size proposed count in the 80% active business test?
- Could any of it count as working capital, and how does the 50% limit apply after year two?
- Is there any risk of the company being treated as an investing business?
- Does the answer change if bitcoin is received as payment for goods or services rather than bought as treasury?
- What records should we keep to show the tests were met during the holding period?
The UK counterpart: trading company status
The UK has no direct equivalent of QSBS, but a similar question arises. Business Asset Disposal Relief on selling shares generally needs the company to be a trading company. HMRC looks at whether non trading activities are substantial, and uses 20% as an indicator across measures such as assets, income and time spent. A large bitcoin holding could count as a non trading activity. EIS and SEIS have their own trading and risk to capital conditions; check with your adviser. See selling a company that holds bitcoin for more.
Source: GOV.UK: Business Asset Disposal Relief: eligibility, HMRC: CG64090: trading company, meaning of substantial (the 20% indicator).
Business Relief for Inheritance Tax raises a similar question about investment activity. See the owner's estate.
Read next
- Selling a company that holds bitcoin: valuation, due diligence, and trading status.
- Bitcoin by business type: C corporations, S corporations and LLCs.
- Sizing guide: setting a cap that protects cash first.
Sources
Primary sources only. Each link was checked on 1 November 2026. Rules change, so confirm the current version with your adviser.
- Cornell LII (unofficial copy of the US Code)26 U.S.C. 1202: partial exclusion for gain from certain small business stock
- GOV.UKBusiness Asset Disposal Relief: eligibility
- HMRCCG64090: trading company, meaning of substantial (the 20% indicator)
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This is general information and education only. It is not financial, investment, tax, accounting, legal or regulatory advice, and it is not a recommendation to buy, sell or hold bitcoin or any other asset. It does not take account of your circumstances or those of your company. You must obtain your own official professional advice to confirm this information is correct before acting on it.
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