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QSBS Exclusion 2026: Founders Can Exclude $15 Million
If you're a startup founder who has held C-corp stock for five or more years, 2026 brought you some of the best news in tax law history. On July 4, 2025, President Trump signed the One Big Beautiful Bill Act (OBBBA) into law, and one of its most founder-friendly provisions permanently raised the Section 1202 QSBS exclusion from $10 million to $15 million per taxpayer, per issuer. At the federal long-term capital gains rate of 23.8%, that's an extra $1.19 million in federal tax savings compared to the old limit.
This isn't a small tweak. For founders, early employees, and angel investors holding qualifying stock, the expanded $15 million QSBS exclusion cap can mean the difference between walking away from an exit largely whole and handing nearly a quarter of your gains to the IRS. Understanding exactly how it works, who qualifies, and how to multiply the benefit across your family is worth every minute of your time.
13 min read
Lenny Whiting
Key Takeaways
The OBBBA (signed July 4, 2025) raised the QSBS exclusion cap from $10 million to $15 million per taxpayer, per issuer, for stock issued after July 4, 2025 Grant Thornton, 2025.
The gross asset threshold for qualifying companies also increased from $50 million to $75 million at time of issuance, opening QSBS to more growth-stage startups.
The exclusion cap is the greater of $15 million or 10 times your adjusted basis per issuer, meaning founders who invested more can shelter far more than $15 million.
California does not conform to Section 1202, meaning CA-resident founders owe state tax of up to 13.3% on QSBS gains even when those gains are 100% federally excluded.
What Is QSBS and How Does Section 1202 Work?
Section 1202 of the Internal Revenue Code has allowed qualifying investors to exclude capital gains on small business stock since 1993, but the benefit was partial for years. Between 2010 and July 3, 2025, stock that met all the requirements qualified for a 100% federal exclusion, meaning a founder who sold $10 million in qualifying gains owed zero federal capital gains tax.
Here's the core mechanic. When you sell Qualified Small Business Stock (QSBS), Section 1202 lets you exclude the gain from federal gross income, entirely. That exclusion means no 20% long-term capital gains rate, no 3.8% Net Investment Income Tax, and no 28% rate that used to apply to QSBS acquired before August 11, 1993. For stock acquired after September 27, 2010, the savings relative to ordinary long-term capital gains treatment run to 23.8 cents on every excluded dollar, according to Keystone Global Partners.
The five-year clock starts the day you acquire the stock at original issuance. Hold it five years, sell for a gain, and if you meet all the rules below, you pay nothing to the federal government on the excluded portion. That's the promise of Section 1202. What the OBBBA did was make that promise bigger.
For a broader look at how business entity structure affects your overall tax exposure, see our business entity tax planning guide.
What Did the OBBBA Change About QSBS in 2026?
Taxpayers have excluded over $140 billion in QSBS gains since 2012 and the OBBBA significantly expanded that runway. For stock issued after July 4, 2025, three major changes took effect.
First, the exclusion cap increased from $10 million to $15 million. That's a 50% jump in the dollar-based limit. The $15 million figure is also indexed for inflation starting in 2027, so the cap will continue growing over time.
Second, the gross asset threshold rose from $50 million to $75 million. This means startups that had grown past the old $50 million ceiling but hadn't yet received stock from a new qualified issuer may now have more time and room to issue qualifying shares.
Third, the OBBBA introduced tiered holding periods. For post-July 4, 2025 stock, you don't have to wait the full five years for any benefit. Hold for three years and you can exclude 50% of the gain. Four years gets you 75%. Five years still delivers the full 100% exclusion. This is a meaningful change for early employees who received options and exercised them but may not want to wait the full five years to exit.
One thing the OBBBA did not change: stock issued on or before July 4, 2025 stays under the old rules. The old $10 million cap, the $50 million gross asset ceiling, and the five-year-only requirement all still apply to pre-OBBBA stock.
Here's the full comparison at a glance:
Provision | Pre-OBBBA stock (issued on/before July 4, 2025) | Post-OBBBA stock (issued after July 4, 2025) |
|---|---|---|
Exclusion cap | $10 million | $15 million (indexed for inflation starting 2027) |
Gross asset threshold | $50 million | $75 million |
Holding period for exclusion | 5 years only, for 100% exclusion | 3 years (50%), 4 years (75%), 5 years (100%) |
Who Qualifies for the QSBS Exclusion?
Wilson Sonsini's Section 1202 analysis identifies five interlocking requirements that every claim must satisfy. Miss one and the exclusion disappears entirely.
1. The issuer must be a domestic C-corporation.S-corps, LLCs, partnerships, and foreign entities don't qualify as issuers. If your startup operates as an LLC or S-corp, its stock doesn't generate QSBS, period. This is the most commonly missed requirement and the reason many founders discover too late that their shares don't qualify.
2. Gross assets must be under the threshold at issuance. The corporation's aggregate gross assets must not exceed $50 million (for pre-OBBBA stock) or $75 million (for post-OBBBA stock) at the time the shares are issued, and immediately after.
3. You must acquire the stock at original issuance. Buying shares from another stockholder in a secondary transaction doesn't create QSBS. The shares must come directly from the company in exchange for money, services, or property.
4. You must hold the stock for the required period. Five years for the 100% exclusion. Three or four years for the tiered exclusions on post-OBBBA stock.
5. The company must conduct a qualifying trade or business. Several industries are explicitly excluded: law, accounting, consulting, financial services, banking, insurance, health, engineering, architecture, and hospitality. Technology, manufacturing, retail, and most other industries qualify.
Non-corporate taxpayers claim the exclusion: individuals, trusts, and estates. Corporations cannot use Section 1202.
How to Calculate Your QSBS Exclusion Limit
The exclusion limit is the greater of two calculations, applied per taxpayer, per issuer, according to Baker Tilly's Section 1202 guide.
Calculation 1: $15 million (for post-OBBBA stock) or $10 million (for pre-OBBBA stock).
Calculation 2: 10 times your adjusted basis in the QSBS sold from that issuer in that tax year.
You use whichever number is higher. This makes the 10x rule extremely powerful for founders who paid meaningful consideration for their shares.
Here's a concrete example. A founder invested $2 million in Series A preferred shares of a qualifying C-corp in 2024, before the OBBBA. The company exits in 2026 for a $25 million gain attributable to her shares. Her exclusion limit is the greater of $10 million (the pre-OBBBA cap) or 10 times her $2 million basis, which is $20 million. She uses the 10x calculation and excludes the full $20 million gain, federally tax-free.
Now run the same scenario under OBBBA rules. If the same founder had invested $2 million in QSBS after July 4, 2025, her exclusion would be the greater of $15 million or $20 million. Same answer: $20 million excluded.
But for a founder with minimal basis (say, $1,000 in founder shares), the $15 million flat cap controls. On $15 million in gain, she pays zero federal tax. On any gain above $15 million, she pays the standard 23.8% combined rate.
The chart below shows the federal tax impact across three gain scenarios, both without and with the QSBS exclusion.
According to the Columbia Law Review's analysis of Section 1202, a taxpayer with $15 million in qualifying QSBS gain saves $3.57 million in federal taxes compared to standard long-term capital gains treatment. That's a meaningful number, and it's why getting this right matters.
How Do Founders Stack QSBS Benefits Across Family Members?
Between 2012 and 2022, roughly 217,000 individual taxpayers and 25,000 trusts and estates claimed a Section 1202 exclusion, according to U.S. Treasury data. That trust number is telling: sophisticated founders have long used gifting and trust strategies to multiply their QSBS exclusion across multiple taxpayers.
The key is that the exclusion is per taxpayer, per issuer. When you gift QSBS shares to another person or entity that qualifies as a separate taxpayer, that recipient gets their own $15 million (or 10x basis) exclusion bucket, completely independent of yours.
Gifting to family members. Gifting QSBS shares to a spouse, child, or other family member before the company exits transfers the shares at their current fair market value. For a founder with shares worth fractions of a penny, that means the gift has almost no taxable value today. When those shares later sell for millions, the recipient claims their own QSBS exclusion. In 2026, the annual gift tax exclusion is $19,000 per recipient ($38,000 if both spouses elect gift-splitting), so small gifts don't even touch your lifetime exemption.
Non-grantor trusts. A non-grantor trust is a separate taxpayer for federal tax purposes, much like a corporation. Foley & Lardner's QSBS stacking analysis describes how a founder with $50 million in QSBS gain could transfer stock into four separate non-grantor trusts, each with its own $10 million (pre-OBBBA) or $15 million (post-OBBBA) exclusion cap, potentially sheltering the entire gain. A grantor trust, by contrast, doesn't work because it's treated as the same taxpayer as the grantor.
A word of caution. On May 20, 2026, Treasury Assistant Secretary Kenneth Kies stated publicly that the IRS is working on guidance to address what he called "stacking abuse," with particular focus on strategies involving more trusts than a shareholder has children. This guidance hasn't been issued yet, but it signals that the most aggressive stacking structures face regulatory risk. Strategies involving one trust per child, or direct gifts to a spouse and children, are viewed as significantly less aggressive than arrangements with a dozen identical trusts.
The married-filing-separately scenario deserves a note too. When spouses file separate returns, each spouse is entitled to their own $7.5 million exclusion on post-OBBBA stock (half of the $15 million joint cap). On a joint return, most advisors treat each spouse as holding a separate exclusion, though the statute doesn't make this explicit. Confirm your approach with qualified tax counsel before relying on dual-spouse exclusions.
What Are the Biggest QSBS Pitfalls to Avoid?
Holland & Knight's 2025 analysis flagged stock redemption rules as "a trap for the unwary" even after the OBBBA expanded Section 1202 benefits. Knowing the exclusion cap is $15 million doesn't help you if your stock doesn't qualify in the first place.
California's non-conformity. This one surprises more founders than any other issue. California explicitly does not conform to Section 1202. At all. A California resident who excludes $15 million federally still owes California income tax on the full gain at rates up to 13.3%. On a $15 million gain, that's up to $1.995 million in state taxes that your federal exclusion doesn't touch. Four states share California's non-conformity: Alabama, Mississippi, and Pennsylvania. New Jersey only came into conformity starting January 1, 2026, per SDO CPA's 2026 QSBS guide.
S-corp stock doesn't qualify. Section 1202 requires the issuer to be a domestic C-corporation at the time the stock is issued and at the time of sale. If your company converted from an S-corp to a C-corp, stock issued during the S-corp period doesn't qualify, even if you've held it for five years.
Stock repurchases that disqualify your shares. If the corporation redeemed any stock from you or a related party during the four-year window surrounding your stock issuance (two years before through two years after), your shares can be disqualified. A broader redemption test also applies to significant buybacks from any shareholder during the two years surrounding issuance. The OBBBA didn't change these redemption rules.
AMT for pre-2013 stock. If you hold QSBS acquired before September 28, 2010, only a partial exclusion applies (50% or 75%), and the excluded portion may be subject to Alternative Minimum Tax. For post-2010 stock with a 100% exclusion, the AMT preference item is zero, so this isn't a concern for most active founders today. But if you have very old stock, double-check the acquisition date.
The qualifying trade or business test. Even if the company is a C-corp with under $75 million in assets, excluded industries like law, accounting, consulting, financial services, and health still disqualify the stock. If your startup pivoted into one of those categories during your holding period, consult a tax advisor to determine whether the 80% active asset test was met for the periods that matter.
For founders comparing entity structures before they raise their next round, see our QBI deduction guide for C-corp vs. pass-through entities.
Frequently Asked Questions
Does the QSBS $15 million exclusion apply to stock I already own?
No. The increased $15 million cap (and the $75 million gross asset threshold) only applies to stock issued after July 4, 2025, when the OBBBA was signed. Stock issued before that date retains the prior $10 million cap and $50 million asset ceiling. Per Baker Tilly, the old rules continue to apply to all pre-OBBBA stock in full.
Can I use QSBS if my company raised a Series B and is now worth $200 million?
Possibly, yes. What matters is the company's gross assets at the time your specific shares were issued, not the company's current valuation. If the company had under $50 million (or $75 million for post-OBBBA stock) in gross assets when you received your shares, you may still qualify even if the company is now worth much more.
What happens if I hold QSBS for only four years before the company exits?
For stock issued after July 4, 2025, you'd qualify for the 75% exclusion tier. You'd exclude 75% of your gain up to the applicable cap, with the remaining 25% taxed at the 28% rate applicable to partially excluded Section 1202 gains, per Grant Thornton. Stock issued before July 4, 2025 requires a full five years.
Can I gift QSBS to my children and have them claim their own exclusion?
Yes, generally. When you gift QSBS, the recipient takes your holding period and your basis for purposes of the holding period calculation. The recipient gets their own per-taxpayer exclusion limit. Gifts must be completed transfers with no retained control, and you should gift shares before the company's value spikes to minimize gift tax exposure. Work with an estate planning attorney to structure this correctly.
Does the QSBS exclusion reduce my basis in other investments?
No. The Section 1202 exclusion simply removes the gain from your federal gross income. It doesn't affect your basis in other assets, and it doesn't reduce any deductions or credits you're otherwise entitled to claim. The benefit is clean and direct.
Conclusion
The OBBBA's expansion of QSBS is one of the most significant tax breaks available to founders in a generation. A $15 million per-taxpayer exclusion, combined with the 10x basis alternative and the new $75 million gross asset threshold, means more founders qualify and can shelter more gain than ever before.
But the exclusion isn't automatic. The C-corp requirement, the original issuance rule, the qualifying business test, and California's persistent non-conformity all create real traps for founders who don't plan ahead. If you think you hold QSBS, or want to issue it, review your stock documents and your state residency with a tax advisor before your exit, not after.
The time to plan is while the shares are worth little and the five-year clock is running. Don't wait.
About Lenny Whiting
CPA Attorney Owner
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