If you’re planning a $20+ million exit, your state of residency determines whether you keep your full federal QSBS tax savings or lose millions to state taxes. Section 1202 now provides powerful federal exclusions of up to the greater of $15 million or 10× basis in gains for QSBS acquired after July 4, 2025 (with the greater of $10 million or 10× basis cap for pre-OBBBA stock).
This eligibility index shows exactly which states conform to federal QSBS treatment and what that means for your exit planning.
What You’ll Learn:
- Complete 50-state + Washington, DC QSBS conformity status with current tax rates
- The four non-conforming states where federal QSBS benefits disappear at the state level
- Real dollar impact of state treatment on $15 million and $40 million exits
- Recent conformity changes, including New Jersey’s 2026 shift and DC’s November 2025 decoupling
- Quick reference tables for pre-exit location planning
All state tax rates shown reflect the applicable top marginal rate on long-term capital gains (or the state’s functional equivalent), not ordinary income rates. QSBS treatment hinges on whether a state conforms to IRC §1202, not on the character of the gain.
Understanding State QSBS Conformity
When a state “conforms” to Section 1202, it respects the federal QSBS exclusion. If you exclude $15 million federally, you also exclude it from state income tax. When a state “does not conform,” your federal exclusion means nothing at the state level. The entire gain gets taxed as if Section 1202 doesn’t exist.
The financial impact is staggering. A California founder with $30 million in QSBS gains pays:
- Federal: $0 (assuming full exclusion)
- California: $3.99 million (13.3% on the full $30 million)
The same founder in New York or Florida pays $0 in federal taxes and $0 in state taxes on the QSBS-excluded portion.
The Four State Conformity Categories
State QSBS treatment falls into four distinct groups, each with dramatically different tax outcomes.
Category 1: Full-Conformity States (Mid-30s States)
These states follow federal QSBS treatment completely. Gains excluded federally are also excluded from state income tax.
States: Arizona, Arkansas, Colorado, Connecticut, Delaware, Georgia, Idaho, Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana, Maine, Maryland, Michigan, Minnesota, Missouri, Montana, Nebraska, New Mexico, New York, North Carolina, North Dakota, Ohio, Oklahoma, Oregon, Rhode Island, South Carolina, Utah, Vermont, Virginia, West Virginia, and Wisconsin.
Tax Impact on $15M QSBS Exclusion: $0
Key Insight: These states represent the majority of the country and include major tech hubs. Founders in conforming states capture the full federal benefit without additional state-level complications.
Category 2: No State Income Tax (9 States)
Nine states impose no personal income tax, making them the most tax advantaged locations for QSBS exits.
States: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming.
Tax Impact on QSBS-Excluded Gains: $0
Tax on Non-QSBS Gains: 0% in eight true no-tax states; 7%–9.9% capital gains excise tax in Washington (above thresholds).
Key Insight: These states provide the ultimate advantage. You receive full federal QSBS exclusion plus zero state tax on non-excluded portions. For a $40 million exit with $15 million QSBS-eligible, you save $3.57 million federally and owe zero state tax on the remaining $25 million in the eight true no-tax states. In Washington, non-QSBS gains may still be subject to the 7%–9.9% state capital gains tax.
Washington Note: Washington is more nuanced: it has no wage income tax, but does impose a 7%–9.9% long-term capital gains excise tax above certain thresholds. Federally-excluded QSBS gains are exempt, but non-QSBS gains can still be taxed.
Category 3: Non-Conforming States (4 States)
Four states explicitly reject federal QSBS exclusions. These states tax the full gain regardless of federal treatment.
States: California, Pennsylvania, Mississippi, and Alabama
Tax Impact on $15M QSBS Exclusion:
- California: $1,995,000 (13.3% rate)
- Pennsylvania: $460,500 (3.07% flat rate)
- Mississippi: $600,000 (4.0% rate for 2026)
- Alabama: $750,000 (5% rate)
The California Challenge: California represents the most significant tax burden for tech founders. With the highest state tax rate and explicit non-conformity, California founders with a $40 million exit face $5.32 million in state tax, even if $15 million qualifies for federal QSBS exclusion.
Compare this to the federal QSBS savings of $3.57 million. California founders can end up paying more in total taxes than founders without QSBS in conforming states.
Category 4: Recent Conformity Change (2 Jurisdictions)
New Jersey (Conforming Starting January 1, 2026)
New Jersey represents a unique timing opportunity. The state begins conforming to federal QSBS treatment on January 1, 2026.
Tax Impact:
- Dispositions before Jan 1, 2026: QSBS exclusion generally not available for NJ purposes (fact-specific).
- Dispositions on/after Jan 1, 2026: NJ conforms to §1202, so QSBS-excluded gain is also excluded for NJ, resulting in $0 NJ tax on the QSBS-excluded portion (assuming you meet all §1202 requirements and are a NJ resident for the relevant period).
Strategic Timing: A New Jersey founder with a late 2025 exit date might save ~$1.6 million by delaying the transaction into 2026, assuming the disposition is recognized in 2026 and the founder is treated as a New Jersey resident for that tax year.
For tax year 2025, Washington, DC, enacted emergency legislation (B26-0457) to decouple from key OBBBA provisions, including the expanded §1202 QSBS exclusion. As a result, otherwise-excludable QSBS gains can now be subject to DC’s 10.75% top rate, depending on the transaction’s timing and how the new law’s effective-date rules apply. Founders closing deals near this transition should confirm sourcing and timing with DC-savvy tax counsel.
Tax Impact: With DC’s 10.75% top rate, this adds approximately $1.6 million in tax on a $15 million QSBS exclusion for exits after November 6, 2025.
Complete State-by-State Quick Reference
| State | QSBS Conformity | Top Rate | Tax on $15M Exclusion |
|---|---|---|---|
| Alabama | Non-Conforming | 5.0% | $750,000 |
| Alaska | No Income Tax | 0% | $0 |
| Arizona | Conforming | 2.5% | $0 |
| Arkansas | Conforming | 3.9% | $0 |
| California | Non-Conforming | 13.3% | $1,995,000 |
| Colorado | Conforming | 4.4%* | $0 |
| Connecticut | Conforming | 7.0% | $0 |
| Delaware | Conforming | 6.6% | $0 |
| Florida | No Income Tax | 0% | $0 |
| Georgia | Conforming | 5.19% | $0 |
| Hawaii** | Partial Conforming | 11.0% | Varies |
| Idaho | Conforming | 5.8% | $0 |
| Illinois | Conforming | 4.95% | $0 |
| Indiana | Conforming | 2.95% | $0 |
| Iowa | Conforming | 3.8% | $0 |
| Kansas | Conforming | 5.7% | $0 |
| Kentucky | Conforming | 3.5% | $0 |
| Louisiana | Conforming | 3.0% | $0 |
| Maine | Conforming | 7.15% | $0 |
| Maryland | Conforming | 5.75% | $0 |
| Massachusetts*** | Partial Conforming | 5% / 9% regime | Varies |
| Michigan | Conforming | 4.05% | $0 |
| Minnesota | Conforming | 9.85% – 10.85%**** | $0 |
| Mississippi | Non-Conforming | 4.0% | $600,000 |
| Missouri***** | Conforming | 4.7% | $0 |
| Montana | Conforming | 4.1% | $0 |
| Nebraska | Conforming | 5.2% | $0 |
| Nevada | No Income Tax | 0% | $0 |
| New Hampshire | No Cap Gains Tax | 0% | $0 |
| New Jersey | Conforming (2026+) | 10.75% | $0 (2026+) |
| New Mexico | Conforming | 5.9% | $0 |
| New York | Conforming | 10.9% | $0 |
| North Carolina | Conforming | 3.99% | $0 |
| North Dakota | Conforming | 2.5% | $0 |
| Ohio | Conforming | 3.75% | $0 |
| Oklahoma | Conforming | 4.75% | $0 |
| Oregon | Conforming | 9.9% | $0 |
| Pennsylvania | Non-Conforming | 3.07% | $460,500 |
| Rhode Island | Conforming | 5.99% | $0 |
| South Carolina | Conforming | 6.4% | $0 |
| South Dakota | No Income Tax | 0% | $0 |
| Tennessee | No Cap Gains Tax | 0% | $0 |
| Texas | No Income Tax | 0% | $0 |
| Utah | Conforming | 4.5% | $0 |
| Vermont | Conforming | 8.75% | $0 |
| Virginia | Conforming | 5.75% | $0 |
| Washington | No Income Tax****** | 0% | $0 |
| Washington DC | Non-Conforming******* | 10.75% | $1,612,500 |
| West Virginia | Conforming | 4.92% | $0 |
| Wisconsin | Conforming | 7.65% | $0 |
| Wyoming | No Income Tax | 0% | $0 |
*Colorado’s base rate is 4.4%; temporary TABOR-driven reductions may lower the effective rate in some years.
**Hawaii allows only the original 50% QSBS exclusion, not the enhanced 100% exclusion.
***Massachusetts and Hawaii are generally treated as partially conforming to §1202. They allow some state-level benefit for QSBS but do not mirror the full federal exclusion; the effective state tax on QSBS gains depends on specific facts. Confirm with state-specific counsel.
****Minnesota – 9.85% (plus a 1% investment-income surtax above certain thresholds, for an effective 10.85% top rate on large capital gains).
*****Missouri allows a 100% deduction for all individual capital gains starting in 2025, making the effective state rate on capital gains (including non-QSBS) 0%, even though the general income tax rate is 4.7%.
******Washington has a 7% capital gains tax on gains exceeding $250K, but federally-excluded QSBS gains are exempt.
*******DC enacted emergency legislation in late 2025 to decouple from the federal QSBS exclusion (IRC §1202(a)). The exact impact for 2025 transactions depends on effective-date details; confirm with DC tax counsel.
Real Exit Scenarios: State Tax Impact
Understanding the numbers helps quantify what state conformity means in practice.
Scenario 1: $40 Million Exit, $15 Million QSBS-Eligible
| State | QSBS Treatment | Federal Tax | State Tax | Total Tax | Effective Rate |
|---|---|---|---|---|---|
| California | Non-Conforming | $5.95M (23.8% on $25M non-excluded) | $5.32M (13.3% on full $40M) | $11.27M | 28.2% |
| New York | Conforming | $5.95M (23.8% on $25M non-excluded) | $2.725M (10.9% on $25M non-excluded only) | $8.675M | 21.7% |
| Texas | No State Tax | $5.95M (23.8% on $25M non-excluded) | $0 | $5.95M | 14.9% |
Savings from Texas vs. California: $5.32 million
Scenario 2: $60 Million Exit, $15 Million QSBS-Eligible
| State | QSBS Treatment | Federal Tax | State Tax | Total Tax | Effective Rate |
|---|---|---|---|---|---|
| California | Non-Conforming | $10.71M (23.8% on $45M non-excluded) | $7.98M (13.3% on full $60M) | $18.69M | 31.2% |
| Florida | No State Tax | $10.71M (23.8% on $45M non-excluded) | $0 | $10.71M | 17.85% |
Savings from Florida: $7.98 million
These tables make it immediately clear how dramatically state QSBS treatment affects your total tax burden. The effective rate column is particularly powerful, as it shows that a California founder can pay nearly double the effective tax rate of a Texas or Florida founder on the same exit.
High-Tax vs. Zero-Tax State Comparison
Even among conforming states, tax rates on non-excluded gains vary significantly. Founders with gains exceeding the $15 million QSBS cap need to consider the total state tax burden.
Top State Rates on Non-Excluded Gains (Conforming States):
| State | Top Rate | Tax on $25M Non-Excluded |
|---|---|---|
| New York | 10.9% | $2,725,000 |
| Oregon | 9.9% | $2,475,000 |
| Minnesota | 9.85% | $2,462,500 |
| Vermont | 8.75% | $2,187,500 |
| Wisconsin | 7.65% | $1,912,500 |
Zero-Tax States: $0 on any amount
The state conformity decision matters most, but for founders with large exits that exceed QSBS caps, the zero-tax states provide compounding advantages.
Pre-Exit Location Planning
The multi-million dollar differences between states have made pre-exit relocation a common planning strategy, particularly for California founders. However, relocation must be executed properly to achieve the intended benefits.
Minimum Recommendations for Valid Residency Change:
- Aim to establish new domicile at least 12–24 months before exit and to spend the clear majority of your time in your new state (many advisors target 183+ days), while significantly reducing days and ties in your former state.
- Obtain a driver’s license, voter registration, and designate primary residence
- Move meaningful family and social connections
- Cut business and personal ties to the former state
California Note: California’s Franchise Tax Board aggressively challenges residency changes around liquidity events. California may also claim a portion of equity gains based on days worked in California, even after relocation. This requires careful allocation analysis with tax counsel.
Your Next Steps
State QSBS eligibility is a critical factor in exit planning that should be addressed years in advance, not weeks before signing a letter of intent. For founders with potential $20+ million exits, the state conformity decision regularly represents $2-8 million in tax outcomes.
Action Items:
- Identify your current state’s QSBS treatment using the reference table above
- Calculate your potential state tax exposure based on projected exit values
- Model relocation scenarios if in a non-conforming or high tax state
- Document your state residency with objective evidence
- Coordinate state planning with federal QSBS optimization strategies
At Keystone Global Partners, we work with venture-backed tech founders in the 0-3 year pre-exit window to model state tax outcomes and integrate location planning into comprehensive exit strategies. Our Personal Exit Advisory program provides detailed tax planning at no charge during your pre-exit phase.
Connect with Keystone to discuss how QSBS eligibility affects your specific exit planning
Disclaimer: This article is for informational purposes only and does not constitute tax, legal, or financial advice. State tax laws change frequently. Information reflects laws as of January 2026. Consult qualified tax and legal advisors before making decisions based on this information.
