Business Owner Advisor Match

QSBS Exclusion Calculator (IRC §1202) — 2026

Section 1202 lets qualifying C-corp stockholders exclude up to $15 million of gain from federal tax entirely. After the OBBBA (July 2025), the rules changed significantly depending on when your stock was issued. This calculator models your federal tax savings, the 28% rate trap for partial exclusions, and how NIIT interacts with your specific situation.

Two sets of rules depending on your stock issuance date:
  • Pre-OBBBA (issued on or before July 4, 2025): Hold >5 years for 100% exclusion, $10M cap (or 10× basis), $50M gross assets threshold
  • Post-OBBBA (issued after July 4, 2025): Tiered — 3 yrs=50%, 4 yrs=75%, 5+ yrs=100%, $15M cap (or 10× basis), $75M gross assets threshold
This determines which exclusion cap and holding period requirements apply.
What you paid for the shares, adjusted for any capital contributions. For founders, often a nominal amount; for later investors, the price paid per round.
Must be held MORE than 5 years for pre-OBBBA stock to qualify. Post-OBBBA stock qualifies at 3, 4, or 5+ years with different exclusion percentages.
Used to stack capital gains into the correct bracket. Include salary, K-1 income, and other ordinary income — but not the QSBS sale gain itself.
Many states conform to §1202 and exclude the same gain. California does not — CA taxes excluded QSBS gain at ordinary income rates. Use 0 if your state conforms (NY, FL, TX, WA, etc.).

How Section 1202 Works

When you sell stock in a C-corporation that qualifies under IRC §1202, the IRS lets you exclude a portion of your gain from federal income tax entirely. That excluded gain doesn't appear on your federal return — it isn't taxed at any rate. For a business owner with millions in C-corp equity, this is the single most powerful tax exemption available in the federal code.

For the exclusion to apply, your stock must meet five core tests at the time of issuance:

  1. C-corporation issuer. S-corps, LLCs, and partnerships don't qualify. The entity must be a domestic C-corp when the stock is issued and when you sell.
  2. Gross assets test. The issuing corporation's aggregate gross assets must not exceed the threshold at issuance — $50M for pre-OBBBA stock, $75M for post-OBBBA stock. This is measured immediately before and after issuance.
  3. Original issuance. You must have acquired the stock directly from the corporation (not on the secondary market) in exchange for money, property, or services.
  4. Active trade or business. At least 80% of the corporation's assets must be used in a qualified trade or business. Several industries are excluded: professional services (health, law, engineering, financial services, accounting, consulting), restaurants and hotels, financial services, and farming.
  5. Holding period. Pre-OBBBA: must hold more than 5 years. Post-OBBBA: minimum 3 years, with exclusion percentage increasing with time (see below).

OBBBA Changes: The New Tiered System (Post-July 4, 2025)

Before the One Big Beautiful Bill Act, Section 1202 was all-or-nothing: hold more than five years and exclude 100%, or hold less and exclude nothing. The OBBBA introduced a tiered system for stock issued after July 4, 2025:1

Holding Period Exclusion % Non-Excluded Rate Best Use Case
3 years50%28%Secondary liquidity, forced sale, early M&A
4 years75%28%Strategic exit with buyer timeline pressure
5+ years100%N/A (zero taxable)Maximum benefit — plan toward this when possible

The 28% Rate Trap — Why Partial Exclusion Requires Planning

Under IRC §1(h)(4), the portion of QSBS gain that is NOT excluded is taxed at a maximum rate of 28% — not at the preferential 15% or 20% long-term capital gains rates that normally apply.2 This creates a potential trap: if you use the 3-year (50%) or 4-year (75%) exclusion, you might expect the non-excluded half to be taxed at 15% or 20%. It isn't — it's taxed at 28%.

Example: $5M gain with 75% exclusion (4-year hold, post-OBBBA)
  • $5M total gain × 75% excluded = $3.75M excluded (zero federal tax)
  • $1.25M non-excluded × 28% = $350,000 federal tax
  • NIIT (3.8%) on $1.25M = $47,500 (if income above threshold)
  • Total federal + NIIT: ~$397,500
  • Compare: same $5M gain taxed at 20% LTCG + 3.8% NIIT (no QSBS) ≈ $1.2M+
Even with the 28% rate trap, the 75% exclusion saves roughly $800K here. But the 28% rate means a 4-year exit costs significantly more than waiting 12 more months for 100% exclusion.

For gain above the $15M cap, normal long-term capital gains rates (15%/20%) apply — that portion is no longer treated as QSBS gain under §1202.

State Tax Conformity

Not all states follow the federal §1202 exclusion. The largest exception is California, which does not conform — California taxes QSBS gain as ordinary income regardless of how long you held the stock. If you're selling a California business, the federal savings are real but CA state tax can still apply at 9.3–13.3%.

States that generally conform to §1202: New York, Texas, Florida, Washington, Nevada, Massachusetts (limited conformity), and most others. Always verify with a state tax specialist before assuming state exclusion — conformity elections can change.

Pre-OBBBA Stock: Still Valuable

If your stock was issued before July 4, 2025, the OBBBA tiered system doesn't apply. You still get the original rules: hold more than 5 years, exclude 100% up to $10M (or 10× basis). That's still an enormous benefit for founders and early investors. If you're approaching the 5-year mark on pre-OBBBA stock, the clock is important — selling one year early eliminates the exclusion entirely.

Related guides and calculators

Maximize your QSBS position before you sell

QSBS planning has hard deadlines: once you sell before reaching the right holding period threshold, the exclusion is gone. A business-owner specialist advisor can model your exact QSBS position, check industry and gross-asset eligibility, time the exit for maximum exclusion, and coordinate state tax strategy. Free match, no obligation.

  1. Holland & Knight: One Big Beautiful Bill Act Increases Tax Benefits for QSBS (July 2025) — confirms post-OBBBA $15M cap, $75M gross assets, tiered 50/75/100% at 3/4/5+ year holding periods for stock issued after July 4, 2025. Pre-OBBBA: $10M cap, $50M gross assets, 5-year hold.
  2. The Tax Adviser: QSBS Gets a Makeover — IRC §1(h)(4) 28% Rate (Nov 2025) — confirms 28% rate applies to non-excluded QSBS gain for partial exclusion years (3yr and 4yr); no AMT preference item for stock issued after September 27, 2010.
  3. IRS Publication 544: Sales and Other Dispositions of Assets — §1202 qualified small business stock exclusion rules, holding period requirements, and gross asset test.
  4. Baker Tilly: Changes to Section 1202 QSBS After OBBBA — analysis of OBBBA §1202 modifications including tiered exclusion, effective dates, and planning considerations.

QSBS rules verified as of June 2026. Pre-OBBBA figures per IRC §1202 as in effect through July 4, 2025. Post-OBBBA figures per One Big Beautiful Bill Act (July 4, 2025). LTCG brackets per IRS Rev. Proc. 2025-32. NIIT per IRC §1411 (thresholds not indexed for inflation). This calculator models federal tax only and does not account for state non-conformity, depreciation recapture, §1202 excluded industry determinations, or original issuance requirements. Verify eligibility with a tax advisor before relying on QSBS treatment.