QSBS Tax Exclusion: How Founders Can Save Millions on Exit

Section 1202 of the tax code allows founders to potentially exclude millions in capital gains from federal taxes. It's one of the most valuable tax benefits available—and one of the most overlooked.

Last Updated: January 2026|12 min read

What is QSBS?

Qualified Small Business Stock (QSBS) under Section 1202 allows eligible shareholders to exclude up to 100% of capital gains from federal income tax when selling qualifying stock held for more than 5 years. It's one of the most powerful tools in founder personal finance.

The Exclusion Amount

Stock Acquisition Date	Exclusion Percentage	Max Exclusion
After Sept 27, 2010	100%	Greater of $10M or 10x basis per issuer
Feb 18, 2009 - Sept 27, 2010	75%	Same limits, but 25% taxed
Before Feb 18, 2009	50%	Same limits, but 50% taxed

Example: The Math

Scenario: Founder sells stock for $15M, basis of $100K, held 6 years

Without QSBS: $14.9M gain × 23.8% = ~$3.5M federal tax
With QSBS: $10M excluded + ($4.9M × 23.8%) = ~$1.17M federal tax

QSBS Savings: ~$2.4M in federal taxes

State Tax Note

QSBS is a federal benefit. Some states conform (no state tax either), others don't. California notably does NOT recognize QSBS. State residency at sale matters for state tax treatment.

QSBS Requirements

Not all startup stock qualifies for QSBS. Both the company and the shareholder must meet specific requirements.

Company Requirements

C-Corporation: Must be a domestic C-corp (not S-corp, LLC, or partnership)

Active business: At least 80% of assets must be used in active business conduct

Gross assets test: <$50M in gross assets at stock issuance and immediately after

Qualified trade: Not in excluded industries (services, banking, hotels, restaurants, etc.)

Excluded Industries

Professional services (law, accounting, consulting, health)

Banking, insurance, financing, leasing

Hotels, restaurants, farming

Mining, oil, gas extraction

Shareholder Requirements

Original issuance: Stock must be acquired at original issuance, not through secondary market transactions. Filing an 83(b) election on restricted stock preserves original issuance status.
5-year holding period: Must hold stock for more than 5 years before sale
Non-corporate: Shareholder must be individual, trust, or partnership (not a corporation)

Maximizing the Benefit

Several strategies can help maximize QSBS benefits for founders and their families.

Stacking Strategies

Gifting to Family Members

Gift stock to family members who can each use their own $10M exclusion. Plan early—transfers reset the holding period in some cases.

Trust Planning

Certain trusts can hold QSBS and claim their own exclusion. Grantor trusts are especially useful for multiplying exclusions.

Section 1045 Rollover

If selling before 5 years, can defer gain by rolling into another QSBS within 60 days. Tacks the original holding period.

Multiple Company Strategy

The $10M limit is per issuer. Founders with multiple qualifying companies can exclude gains from each.

Plan Early

QSBS planning works best when done early, before the company is valuable. Gifting stock at low valuations to family trusts can multiply exclusions while minimizing gift tax implications. Once the company is worth $100M, it's too late for most strategies.

Common Mistakes

Not documenting qualification: Keep records proving QSBS requirements were met at issuance

Selling before 5 years: Miss the exclusion entirely. Consider 1045 rollover if early sale is necessary

Ignoring state taxes: Federal exclusion doesn't mean state exclusion. Plan for state tax exposure

Not stacking exclusions: Using only founder's exclusion when family trusts could multiply benefits

Buying stock instead of original issuance: Secondary purchases don't qualify for QSBS

Need Help With QSBS Planning?

Eagle Rock CFO helps founders understand and maximize tax benefits like QSBS.

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