QSBS Exclusion Chart: Section 1202 Tax Benefits

Last updated: November 2026

The Section 1202 tax exclusion for Qualified Small Business Stock (QSBS) has evolved dramatically from its original 1993 introduction to today’s One Big Beautiful Bill Act expansion. If you’re a venture-backed founder researching your exit strategy, understanding the exact exclusion percentages and eligibility timeline could save you millions in federal taxes.

This definitive QSBS exclusion chart breaks down every tier, effective date, and exclusion cap so you can optimize your tax strategy regardless of when you acquired your stock.

Your potential tax savings depend entirely on when you acquired your stock. A difference of just one day can mean the distinction between paying zero taxes and owing millions to the IRS.

Pre-OBBBA Rules (Stock Acquired On or Before July 4, 2025)

Post-OBBBA Rules (Stock Acquired After July 4, 2025)

Note: Effective tax rates reflect a 28% capital gains rate and 3.8% Net Investment Income Tax (NIIT) on the taxable (non-excluded) portion of QSBS gains. For Pre-OBBBA QSBS, calculations also include a 7% Alternative Minimum Tax (AMT) preference adjustment.

The OBBBA, signed into law on July 4, 2025, represents the most significant expansion of QSBS benefits since the provision was created.

Here’s what changed for venture-backed founders:

Shortened Holding Period Benefits

Previously, you needed to hold for more than five full years to see any QSBS tax benefit; a day short meant zero exclusion. The new law creates a tiered system starting at just three years:

Note that the tiers are forward looking: stock first acquired after July 4, 2025 cannot reach the 3-year tier until July 2028 at the earliest, or the 5-year tier until July 2030.

Three-Year Scenario: A founder with $20 million of gain on post-OBBBA QSBS (held at least 3 years but less than 4) has eligible gain capped at $15 million. The 50% tier excludes $7.5 million. The remaining $7.5 million of eligible gain is taxed at 31.8% (the 28% Section 1202 rate plus 3.8% NIIT), about $2.39 million, and the $5 million above the cap is taxed as regular long-term capital gain at 23.8%, about $1.19 million. Total federal tax: roughly $3.58 million, versus $4.76 million on a fully taxable non-QSBS sale at 23.8%.

Four-Year Scenario: The same founder holding at least 4 years excludes 75% of the $15 million of eligible gain, or $11.25 million. The remaining $3.75 million of eligible gain is taxed at 31.8% (about $1.19 million), and the $5 million above the cap is taxed at 23.8% (about $1.19 million). Total federal tax: roughly $2.38 million.

Five-Year Scenario: Holding at least 5 years excludes 100% of the $15 million of eligible gain. The $5 million above the cap is taxed at 23.8%, about $1.19 million in federal tax. Eliminating tax on the full $20 million would require a larger cap (for example, through the 10x basis alternative) or additional exclusions across separate taxpayers.

How the Cap and the Tiers Work Together

The exclusion percentage and the per-issuer cap are two separate limits, and both apply. The cap limits how much gain is even eligible; the tier percentage then determines how much of that eligible gain is excluded. On a $20 million gain with nominal basis (post-OBBBA stock):

The maximum exclusion at the 3-year tier is $7.5 million, not $15 million. Gain above the cap is not penalized at the 28% rate; it is ordinary long-term capital gain at 23.8%.

Where does your stock actually land? Most founders hold several tranches, each under different rules, and the gap between the right analysis and the wrong one is often seven figures. A 20-minute review will tell you which tiers, caps, and dates apply to your shares, and what is still fixable before your exit. Schedule a 20-minute QSBS review

Increased Exclusion Caps

The per-issuer gain cap jumped from $10 million to $15 million for stock acquired after July 4, 2025. This 50% increase acknowledges inflation since the original 1993 cap and will be indexed for inflation beginning in 2027.

Higher Asset Threshold for Qualifying Companies

Companies can now have up to $75 million in aggregate gross assets (up from $50 million) and still issue QSBS. The test is measured as cash plus the adjusted tax basis of other property, not fair market value, and must be satisfied at all times before the issuance and immediately after it.

A company that crosses the threshold even briefly permanently disqualifies stock issued afterward, though previously issued qualifying stock is unaffected. This expanded threshold means later-stage startups can continue issuing QSBS-eligible equity longer into their growth trajectory. Both the $75 million threshold and the $15 million cap are indexed for inflation beginning in 2027.

Understanding the exclusion percentages is just the beginning. The real complexity lies in how these rules interact with your acquisition timeline, and getting the details wrong can cost millions.

Acquisition Date Matters More Than Sale Date

Your QSBS exclusion percentage is locked in based on when you acquired the stock, not when you sell it. A founder who received stock in 2015 gets 100% exclusion (after 5 years) even if they sell in 2030, while stock acquired in 2026 follows the new tiered system.

Mixed Stock Positions Require Meticulous Records

Many founders will have multiple tranches of stock with different acquisition dates and exclusion rules. Consider this scenario:

Founder Sarah’s Stock Portfolio:

• 1 million shares acquired December 2020 (100% exclusion after 5 years)
• 500,000 shares acquired August 2025 (tiered exclusion system)
• 200,000 shares from option exercises in 2026 (tiered exclusion system)

Each tranche follows its own rules, making precise record-keeping essential for optimal tax planning.

The $75 Million Asset Test Creates New Opportunities

Previously, a company raising a large Series B might have exceeded the $50 million asset threshold, disqualifying future stock issuances from QSBS treatment. The increase to $75 million provides more runway for equity compensation and additional fundraising while maintaining QSBS eligibility.

State Tax Considerations

While this chart focuses on federal exclusions, remember that state treatment varies significantly:

State treatment has been a moving target since the OBBBA passed. As of September 2026:

• California: Does not conform. The full federal exclusion is added back, with a top rate of 13.3%.
• Oregon: Decoupled. SB 1507 (signed April 2026, retroactive to January 1, 2026) requires addback of federally excluded QSBS gain.
• Illinois: Decoupled. Addback applies for tax years ending on or after December 31, 2026, which captures all 2026 calendar-year sales.
• New Jersey: Now conforms for tax years beginning on or after January 1, 2026. Gains recognized in 2025 remained fully taxable.
• New York: Conforms and follows federal treatment, though decoupling proposals have surfaced in recent budget cycles and bear watching.
• Vermont, Maine (stock acquired after July 3, 2025), and Rhode Island (beginning 2027) have also decoupled in whole or in part.
• Florida, Texas, Nevada: No state income tax, so the federal exclusion is the full story.

State conformity is constantly evolving, and several states have decoupled since the OBBBA passed. Verify your state’s current position before relying on the federal exclusion in your exit model.

For the full 50-state picture, see our Capital Gains Tax by State guide, which we maintain as the current rate and conformity reference.

The difference between maximizing and missing your QSBS benefits often comes down to proactive planning decisions you make today, not scrambling to understand the rules after you’ve already signed a term sheet.

For Pre-Exit Founders (0-3 Years Out)

If you’re still 12-36 months from a liquidity event, consider:

• Stock Documentation Review: Ensure all acquisition dates are properly documented, and whether shares meet the original issuance requirement
• Additional Equity Opportunities: Consider whether exercising options or receiving additional equity grants makes sense under the new OBBBA rules
• State Domicile Planning: Evaluate whether relocating to a favorable state jurisdiction aligns with your timeline

For Active Exit Situations

If you have an LOI on the table:

• Mixed Tranche Analysis: Calculate the optimal tax treatment for each issuer/stock position
• Timing Flexibility: Understand whether delaying the exit by 3-12 months could trigger a more favorable exclusion tier
• Rollover Opportunities: Consider a Section 1045 rollover for gain that will not be excluded. Full deferral requires reinvesting the full sale proceeds (not just the gain) in replacement QSBS within 60 days of the sale, plus an affirmative election on a timely filed return.

Sophisticated founders aren’t just focused on the basic exclusion percentages.

Advanced strategies include:

Your Next Steps

The QSBS exclusion landscape has never been more complex, or more opportunity-rich. With the OBBBA’s expansion creating multiple exclusion tiers and higher caps, the potential federal tax savings for venture-backed founders can easily reach into eight figures.

But navigating this complexity requires expertise in both the technical tax rules and the practical realities of startup exits. Getting the planning wrong doesn’t just cost money; it can cost millions in unnecessary taxes. If you’re a venture-backed founder with a potential exit on the horizon, the time for QSBS planning is now, not after you’ve signed the definitive agreement.