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Section 1202 QSBS Capital Gains Tax Exclusion Simulator
IRC § 1202 Rules

IRC Section 1202 QSBS Tax Exclusion Calculator

Calculate your tax-free startup equity exit. Model the greater of $10M vs 10x basis cap, 50% / 75% / 100% acquisition tiers, California non-conformity, and net federal & state tax liability.

Exit Scenarios:

Stock & Acquisition Parameters

Client-Side Confidential
Original investment/strike
$

Basis determines the 10x limitation test.

Gross stock sale value
$

Total cash / consideration received.

California and select states reject IRC § 1202, assessing full state tax.

If you previously sold tranches of stock in this same company in earlier tax years.

$
Tax Exclusion Summary 0% Fed Rate
Total Taxes Saved via QSBS
$0

Calculating IRC Section 1202 tax shields...

ALLOWABLE CAP TEST: $10,000,000 Rule
TOTAL TAX-FREE GAIN: $0
IRC § 1202(b)(1) Ceiling Test Greater of A vs B
Test A: $10M Statutory Ceiling
$10,000,000 minus prior exclusions
$10,000,000
Test B: 10x Adjusted Basis
10 × Cost Basis
$100,000
Tax Waterfall & Final Bill 2026 Rates
Total Capital Gain: $11,990,000
Less: Excluded Gain (§ 1202): -$10,000,000
Taxable Capital Gain: $1,990,000
Federal Capital Gains Tax (20%): $398,000
Net Investment Income Tax (3.8%): $75,620
State Income Tax: $0
Total Estimated Tax Bill: $473,620

State Tax Conformity: The California Trap

Why California startup founders face massive surprise tax bills despite 100% federal exclusion.

Conforming States (Texas, Washington, Florida, NY, etc.) 0% State Tax on QSBS

Most states incorporate IRC Section 1202 into their state tax codes, or do not levy personal income taxes on capital gains. Qualified stock holders in these jurisdictions pay $0 state tax on the excluded gain.

California (Non-Conforming) Up to 14.4% State Tax

In Cutler v. Franchise Tax Board (2012), California's in-state preference for QSBS was struck down. Instead of adopting the federal standard, California repealed the entire exclusion. All QSBS gain is taxed as ordinary income at rates up to 13.3% (plus 1.1% State Disability Tax for top earners = 14.4%).

IRC Section 1202 QSBS: Statutory Mechanics & Stacking Strategies

Internal Revenue Code (IRC) Section 1202 was enacted to incentivize high-risk capital investment in early-stage American small businesses. For tech founders, venture capitalists, and early employees, it represents the single most powerful tax shield in the United States Internal Revenue Code.

1. The 5 Core Qualifications for QSBS

  • Domestic C-Corporation: The company must be a US C-Corp at the time the stock is issued. LLCs and S-Corps do not qualify (though LLC conversion can qualify for future growth).
  • Original Issuance: You must acquire the stock directly from the company in exchange for money, property (other than stock), or services (e.g. founder stock or exercised stock options). Secondary share purchases do not qualify.
  • $50 Million Gross Assets Test: The aggregate gross assets of the corporation (cash plus adjusted basis of property) cannot have exceeded $50,000,000 at any time prior to, or immediately after, your stock issuance.
  • Active Business Test: At least 80% of corporate assets must be actively used in a qualifying trade. Excluded industries include law, accounting, healthcare, financial services, farming, hotels, and restaurants.
  • 5-Year Holding Period: You must hold the shares for more than 5 consecutive years prior to sale.

2. The 10x Basis Rule Explained

Many founders mistakenly believe the QSBS exclusion is capped at $10 million. Under IRC § 1202(b)(1)(B), the exclusion is the greater of $10M or 10 times the aggregate adjusted tax basis of the stock sold.

If a venture capital fund or angel investor invests $3,000,000 into a Series A round, their maximum tax-free exclusion is:

Max Exclusion = 10 × $3,000,000 Basis = $30,000,000 Tax-Free Gain

3. QSBS "Stacking" with Non-Grantor Trusts

Because the $10M cap applies per taxpayer, high-net-worth founders frequently "stack" QSBS by gifting shares to multiple irrevocable non-grantor trusts (e.g. for children or family members) before the stock experiences major appreciation. Each non-grantor trust is a separate legal taxpayer with its own independent $10M § 1202 exclusion ceiling.

Frequently Asked Questions

Acquisition tiers, Section 1045 rollovers, and documentation.

What happens if I sell my stock before the 5-year holding period? ▼

If you sell before meeting the 5-year requirement, you cannot claim the § 1202 exclusion. However, under IRC Section 1045, if you held the stock for more than 6 months, you can roll over the capital gains tax-free into a new replacement QSBS company within 60 days of the sale. Your original holding period tacks onto the replacement shares.

Do stock options (ISOs/NSOs) qualify for QSBS? ▼

Stock options themselves do NOT start the 5-year clock. The 5-year clock begins only when the options are exercised and the underlying stock is issued (or when an 83(b) election is filed on unvested restricted stock). This is why early employees often early-exercise their options to start the QSBS holding period clock.

Are excluded QSBS gains subject to the 3.8% Net Investment Income Tax (NIIT)? ▼

No! For stock acquired on or after September 28, 2010 (100% exclusion tier), the excluded gain is completely exempt from the 3.8% Net Investment Income Tax (NIIT) and exempt from Alternative Minimum Tax (AMT). Any gain exceeding the cap remains subject to standard 20% federal capital gains plus 3.8% NIIT.