QSBS Calculator — Section 1202 Federal Exclusion

Qualified Small Business Stock (QSBS) under IRC §1202 is C-corp stock that meets specific qualification tests. When held more than 5 years, an eligible non-corporate taxpayer can exclude a percentage of the gain from federal income tax on sale — up to 100% for stock acquired after September 27, 2010, capped at the greater of $10 million or 10× the taxpayer's adjusted basis per issuer.

Five core tests: (1) the issuer must be a domestic C-corp at issuance and substantially all of the holding period; (2) the stock must be acquired at original issuance from the corporation in exchange for money, property, or services; (3) the corporation's aggregate gross assets must not exceed $50 million at or immediately after issuance; (4) at least 80% of assets must be used in an active qualified trade or business — most professional services like law, finance, healthcare, consulting are disqualified; (5) the holder must hold the stock for more than 5 years before sale.

The exclusion is capped per issuer per taxpayer at the greater of: $10 million lifetime (reduced by aggregate prior excluded gain from the same issuer), OR 10× the taxpayer's aggregate adjusted basis in qualifying stock disposed of during the year. The 10× basis test only beats the $10M cap when basis exceeds $1M. For founders with very low basis (e.g., $1,000 of par-value stock), the $10M cap is the operative limit.

California, New Jersey, Pennsylvania, and Mississippi are the major non-conformers — they tax the full federally-excluded gain at state ordinary or capital-gain rates. Massachusetts and Alabama partially conform. All other states with income tax (and DC) generally follow federal AGI as the starting point and pass the §1202 exclusion through to state tax. For a tech founder with a $9M federally-excluded gain, the California state-tax surcharge can be $1.2M+ at the 13.3% top rate. State residency at the time of sale is the relevant factor; some states have aggressive trailing-nexus rules for tax-motivated moves.

If you must sell QSBS before the 5-year mark, IRC §1045 allows you to roll the gain into another QSBS investment within 60 days and defer recognition. The rolled basis carries forward with adjustment, and the holding periods aggregate (with technical limits). This is how some serial entrepreneurs maintain QSBS treatment across multiple ventures even when individual companies sell early. The rollover requires filing an election with the original-year return and tracking the carryover basis.

Stock acquired before September 28, 2010 has an AMT preference under §57(a)(7) equal to 7% of the federally-excluded gain. This is a relatively small AMT hit (a $5M excluded gain creates a $350k AMT preference, which at 26-28% AMT rate produces ~$95k of AMT) but it matters for taxpayers near AMT-exemption thresholds. Stock acquired AFTER September 27, 2010 has zero AMT preference — the 100% exclusion is also AMT-clean. Most modern startup equity falls in the post-2010 era and avoids the AMT preference entirely.

The corporation should produce: (1) certification at issuance that it's a domestic C-corp, that aggregate gross assets are under $50M, and that the trade/business qualifies; (2) per-issuance asset roll-forward demonstrating the $50M test; (3) annual confirmation that the active-trade test continues to be met during the holding period. The taxpayer should keep: (a) stock certificates / brokerage records showing original-issuance purchase, (b) basis records (cash paid, property contributed, services rendered + 83(b) inclusions), (c) the company's QSBS certification, (d) holding-period documentation. Most early-stage CPA firms don't proactively produce QSBS documentation — request it before each financing round.