QSBS Exemption and Strategic Planning:
A Founder's Guide to Section 1202

By Abboud Chaballout, Founder & Managing Attorney

Published September 1, 2025  ·  Last updated September 14, 2026

For founders of technology startups formed as C corporations, the tax code offers a generous but often overlooked opportunity: the potential to exclude up to $10 or $15 million in capital gains from federal taxation (and from state taxation in many states) through the Qualified Small Business Stock (QSBS) exemption under Section 1202 of the Internal Revenue Code.

The exact amount of gain a founder can exclude depends on the date they received their stock. Stock received before July 5, 2025 may qualify for an exemption of up to $10M and stock received after may qualify for an exemption of up to $15M now that the One Big Beautiful Bill Act (OBBBA) is the law of the land. It is important to note that while founders are the focal point of this article, employees, consultants, advisors, and investors all stand to benefit from the QSBS exemption as well.

This powerful tax break isn't just a one-time benefit. Through a strategic planning technique called “QSBS stacking,” founders can create multiple $10 million tax-free buckets (or multiple $15 million tax-free buckets if OBBBA eligible), multiplying their tax savings substantially.

For founders planning on being successful, understanding and properly structuring around QSBS qualification criteria isn't just tax planning. It's potentially saving millions of dollars, allowing you to fully realize the rewards of your innovation, risk-taking, and vision.

QSBS stacking multiplies the QSBS exemption.

What Is the QSBS Exemption?

The purpose of the QSBS exemption is to encourage formation of and investment in new businesses. The reward for participating in a new business is an opportunity to exclude capital gains from federal income tax. The main catch, assuming the stock in the new business is QSBS eligible, is the stock must be held for five years or more prior to its sale (the holding period dynamics for OBBBA eligible stock is improved). This is called the holding period. For stock that is issued after July 5, 2025, eligible taxpayers not only benefit from excluding up to 100% of the gain when stock is held for 5 or more years, but also enjoy partial exclusions for shorter holding periods, a significant advantage compared to the previous all-or-nothing approach.

While often referred to as a “small business” stock exemption, the criteria for a “qualified small business” specifically includes companies with aggregate gross assets of $50 million ($75 million for OBBBA stock) or less at the time the stock is originally issued. Founders often mistake this cap with the valuation of their company. This cap applies to the value of the aggregate gross assets, not the value of the stock as determined by investors. Generally speaking, founders can think about the value of their gross assets as equaling the amount of cash raised plus the value of their startup's IP. As such, many founders of rapidly growing startups with high valuations will find that their stock still qualifies for this valuable default tax break.

The benefit of the QSBS exemption is substantial: a non-corporate shareholder, which includes individuals, trusts, and estates, can exclude from their gross income the gain from the sale of QSBS, up to the greater of $10M ($15M for OBBBA stock) or 10 times the taxpayer's basis in the stock. For founders who typically acquire their initial stock at par value (often $0.00001 per share), the $10M/$15M cap is usually the relevant limitation since it far exceeds what 10x their basis would yield. Conversely, for investors who contribute capital in a company that is worth millions (but under the previously mentioned $50M and $75M aggregate gross asset cap), the 10x basis rule could potentially lead to a much larger tax exclusion if the company experiences substantial growth.

QSBS Eligibility Requirements

For companies registered prior to July 5, 2025

• C Corporation Structure. The company must be a domestic C corporation (not an S corporation or LLC)
• Five-Year Holding Period. Stock must be held for more than 5 years before sale
• $50 Million Asset Limit. Company must have aggregate gross assets of $50 million or less when stock is issued
• Active Business Requirement. At least 80% of assets must be used in active business operations
• Original Issuance. Stock must be acquired directly from the company at original issuance
• Business Type Restrictions. Certain service businesses are excluded (health, law, financial services, etc.)
• Exclusion cap. Capital gains in the amount of the greater of $10 million or 10x the holder's basis can be excluded

Updates in the law for companies registered after July 5, 2025

• Holding Period. Updated to a tiered schedule: 3 years = 50% exclusion, 4 years = 75% exclusion, 5+ years = 100% exclusion
• Asset Limit. Changed to $75 million
• Exclusion cap. Now $15 million of capital gains can be excluded. The 10x basis option remains.

Use our interactive eligibility checklist to walk through these requirements →

QSBS Stacking

While the QSBS exemption offers a significant default tax break of $10 million ($15M if OBBBA eligible, or 10x your basis) per qualified taxpayer, a powerful strategy known as QSBS stacking allows founders to take multiple bites at this tax-saving apple. This technique creates additional $10 million (or $15 million if OBBBA eligible) tax-free buckets beyond the initial exemption, substantially amplifying potential tax savings for founders whose exits may exceed the individual limit.

Strategies for amplifying QSBS tax savings

The separate taxpayer principle

The fundamental principle that makes QSBS stacking work is that the $10 million (or $15 million if OBBBA eligible) exclusion limit applies per taxpayer, not per company. This creates a powerful opportunity to multiply your tax savings through strategic planning.

For example: If you're a founder whose stock is worth $50 million, you could:

• Keep all shares personally and exclude $10 million of taxation from your $50 million gain upon a sale
• OR gift a certain number of your shares to 4 separate non-grantor trusts (each a distinct taxpayer), creating five $10 million exemptions (including your personal share) that could offset your entire $50 million gain

How gifted shares preserve QSBS status

The cornerstone of effective QSBS stacking is the strategic gifting of qualified small business stock. When you gift QSBS to other taxpayers, each recipient becomes entitled to their own separate $10 million (or $15 million if OBBBA eligible) exclusion upon sale.

Section 1202 explicitly preserves the QSBS status of gifted shares. The recipient taxpayer steps into your shoes, inheriting both the original acquisition date and QSBS qualification. This means:

1. The five-year holding period continues uninterrupted from your original acquisition date
2. The recipient receives the full QSBS tax benefits despite not being the original purchaser
3. Each properly structured gift creates an entirely new $10 million (or $15 million if OBBBA eligible) tax-free bucket

QSBS stacking strategy: multiplying exclusions through separate taxpayers

QSBS Tax Savings

How much can you save? A $20 million exit scenario

To illustrate the practical impact of QSBS stacking, let's examine a realistic scenario for Sarah, a California-resident founder who registered her company in 2020 and is now selling her shares worth $20 million after initially purchasing her shares for $100.

Without the QSBS exemption

Let's say Sarah's company was originally set up as an LLC. Because QSBS is only available to shareholders of C corporations, her shares don't qualify. She pays federal capital gains and California income tax on the full $20M gain.

With basic QSBS exemption (no stacking)

Now let's assume Sarah's company was a C corporation from the beginning. She qualifies for her first bite at the tax free apple as long as her shares continued to qualify for QSBS under Section 1202. Her first $10M of gain is sheltered from federal tax; but she would have to pay California capital gains as a California resident.

With QSBS stacking (California non-grantor trust)

Before the exit Sarah gifts half her shares to a non-grantor trust set up in California, a separate taxpayer with its own $10M federal exclusion. This is her second bite at the apple. Federal tax drops to zero, but given her California residency and the California situs of her trust, California taxes the full $20M gain.

Note: California does not conform to federal QSBS rules.

With Nevada non-grantor trust

Before the exit Sarah gifts half her shares to a non-grantor trust set up in Nevada rather than California. Situating the trust in Nevada removes the trust's share of the gain from California's reach. Sarah still owes California tax on her personal half because she still lives in California, but the Nevada trust won't pay California state capital gains taxes on liquidity.

Note: distributions to California beneficiaries later down the line will be taxed retrospectively.

Maximum savings: Sarah moves to Nevada in addition to setting up a Nevada trust

Sarah becomes a Nevada resident before the exit. Neither share is now subject to California income tax; federal QSBS zeros out the federal side, and Nevada has no state income tax.

Important Note: The Nevada trust benefits depend on proper structure and administration. It is very important to speak with one of our attorneys when considering multi-state trust planning.

Tax benefits of QSBS stacking strategy

QSBS Gift Tax Planning

What is the lifetime gift tax exemption?

The lifetime gift tax exemption is the total amount of assets you can give away during your lifetime or at death before incurring federal gift or estate taxes. As of 2026, this exemption is $15 million per individual (or $30 million for married couples). Any gifts that exceed your annual gift tax exclusion of $19,000 per recipient count against this lifetime exemption.

Lifetime gift tax exemption explained

Why early gifting matters for QSBS planning

When implementing a QSBS stacking strategy, gifting shares early in your company's lifecycle, when valuations are significantly lower, consumes much less of your lifetime exemption. For example:

Impact of company valuation on lifetime exemption used

• Gifting 10% of your shares when your startup's true value is $1M would require you to use up $100,000 of your lifetime exemption.
• Waiting until your company is worth $100M would require you to use up $10 million of your exemption to gift the same percentage of shares.

Trust Types for QSBS Stacking

When implementing QSBS stacking strategies, selecting the right trust structure is crucial. The optimal trust type depends on your specific goals: maximizing your federal tax savings, avoiding state-level taxation, or maintaining access to assets.

Common trust structures

• Standard Non-Grantor Irrevocable Trusts. Establishes separate taxpayers to multiply QSBS benefits while removing assets from your estate
• Charitable Remainder Trusts (CRTs). Allows charitable giving while creating additional QSBS capacity
• Incomplete Non-Grantor Trusts (INGs). Allows transfer of QSBS while potentially retaining ability to receive distributions from the trust

State tax planning: choosing the right trust jurisdiction

Trust jurisdiction sits at the center of state-level tax planning. States vary widely in whether they conform to federal QSBS rules and how they source trust income. The factors that matter most:

• State income tax rates and treatment of QSBS gains
• Asset protection strength
• Trust law flexibility
• Privacy provisions
• Administrative requirements

View our QSBS state conformity map to see which states tax QSBS gains →

Key opportunities in QSBS trust planning

Balancing access and tax benefits in QSBS trusts

Opportunity 1: Retained access

• Specialized trust structures can allow you to retain access to trust funds while still creating separate QSBS buckets
• The right structure and jurisdiction can maintain your access to proceeds post-sale

Opportunity 2: Maximum tax efficiency

• Strategic trust planning can potentially eliminate both federal and state capital gains tax on qualified QSBS sales
• This outcome depends entirely on selecting the correct trust structure and jurisdiction