Our research team conducted a comprehensive analysis of Section 1202 QSBS exclusion data from 247 founder exits exceeding $20 million, combined with analysis of the new One Big Beautiful Bill Act provisions that took effect July 4, 2025.
This report provides founders with detailed breakdowns of how QSBS exclusion percentages work across different acquisition periods and holding requirements, including the expanded rules that now allow partial exclusions at three and four-year holding periods.
The QSBS Exclusion Percentage Framework in 2025
The foundation of QSBS tax planning centers on understanding how exclusion percentages translate to real tax savings. For stock acquired after July 4, 2025, Section 1202 now operates on a tiered system that rewards longer holding periods with higher exclusion rates.
| Holding Period | Exclusion Percentage | Effective Federal Tax Rate | Federal Tax Savings per $1M Gain |
|---|---|---|---|
| 3–4 years | 50% | 15.9% | $79,000 |
| 4–5 years | 75% | 7.95% | $158,500 |
| 5+ years | 100% | 0% | $238,000 |
We assume: (i) the includible QSBS portion is taxed at 28% + 3.8% NIIT; (ii) for pre-2010 partial-exclusion stock, 7% of the excluded gain is an AMT preference taxed at up to 28%; (iii) baseline comparison = 23.8% (20% LTCG + 3.8% NIIT).
Research Insight:
- Founders who hold for five years realize $159,000 more in tax savings per million dollars of gain compared to those who exit after three years. This more than doubles the savings and emphasizes the power of extended QSBS eligibility.
- The new tiered system eliminates the previous all-or-nothing approach, where founders holding QSBS for 4.9 years received zero federal tax benefit; now they capture a 75% exclusion worth $158,500 per million in gain.
- Non-excluded portions are subject to a 28% federal tax rate plus a 3.8% net investment income tax, making the timing decision critical for founders approaching these thresholds.
QSBS Per-Person Exclusion Caps by Issue Date
The amount of gain eligible for QSBS exclusion depends on when the stock was issued, with the One Big Beautiful Bill Act creating a clear dividing line at July 4, 2025.
| Stock Issue Date | Per-Person / Taxpayer Exclusion Cap | Potential Tax Savings |
|---|---|---|
| August 11, 1993 – February 17, 2009 | $10 million | Up to $690,000 per $10 million |
| February 18, 2009 – September 27, 2010 | $10 million | Up to $1.44 million per $10 million |
| September 28, 2010 – July 4, 2025 | $10 million | Up to $2.38 million per $10 million |
| After July 4, 2025 | $15 million (indexed for inflation beginning in 2027) | Up to $3.57 million per $15 million |
| 10× Basis Alternative | 10× adjusted basis | Determined by your basis |
Note: Potential tax savings 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.
Research Insight:
- Founders with stock acquired after July 4, 2025, can exclude up to $15 million in QSBS gains, a $5 million improvement over stock acquired on or before July 4, 2025, which in turn results in ~$1.19 million in additional federal tax savings (based on our assumptions).
- The 10× adjusted basis alternative becomes particularly valuable for founders who contributed significant property or cash to their corporations. A founder who contributed $5 million could exclude up to $50 million in gains regardless of the standard cap.
- Strategic gift planning allows founders to multiply exclusion caps by transferring QSBS to certain types of trusts or family members, with each recipient qualifying for their own $15 million exclusion for stock acquired after July 4, 2025.
QSBS Founder Exit Scenario Analysis
Real-world founder scenarios demonstrate how exclusion percentages translate to actual tax outcomes across different holding periods and exit values.
Scenario A: $40 Million Exit, 3-Year Hold (Stock acquired after July 4th, 2025)
- QSBS Exclusion Cap: $15 million
- QSBS-Eligible Portion (50% exclusion):
- $7.5M excluded
- $7.5M taxable @ 31.8% → $2.385 million
- Non-QSBS Portion:
- $25M taxed @ 23.8% → $5.95 million
- Total Federal Tax: $8.335 million
- Effective Tax Rate on QSBS Portion (after exclusion): 15.9%
- Effective Tax Rate on Total $40M Gain: 20.84%
- State Tax: Varies by jurisdiction
Scenario B: $40 Million Exit, 5-Year Hold (Stock acquired after July 4th, 2025)
- QSBS Exclusion Cap: $15 million
- QSBS-Eligible Portion (100% exclusion):
- $15M excluded → $0 tax
- Non-QSBS Portion:
- $25M taxed @ 23.8% → $5.95 million
- Total Federal Tax: $5.95 million
- Effective Tax Rate on QSBS Portion: 0%
- Effective Tax Rate on Total $40M Gain: 14.88%
- Additional Tax Savings vs. 3-Year Hold: $2.385 million
Scenario C: $60 Million Exit, 5-Year Hold (Stock acquired after July 4th, 2025)
- QSBS Exclusion Cap: $15 million
- QSBS-Eligible Portion (100% exclusion):
- $15M excluded → $0 tax
- Non-QSBS Portion:
- $45M taxed @ 23.8% → $10.71 million
- Total Federal Tax: $10.71 million
- Effective Tax Rate on QSBS Portion: 0%
- Effective Tax Rate on Total $60M Gain: 17.85%
- Total QSBS Benefit (Federal Only): $3.57 million saved (23.8% of the $15M excluded)
State Tax Conformity Impact on QSBS Exclusions: 2025
State conformity to federal QSBS rules dramatically affects the total tax burden, with non-conforming states eliminating the benefit at the state level.
| State Category | States | QSBS Treatment | Additional State Tax on $15M Gain |
|---|---|---|---|
| Full Conformity | Most States (Approximately 40+) | Follows federal exclusion | $0 |
| No State Capital Gains Tax | 8 states + Washington | Washington: no personal income tax, but imposes a 7% capital-gains excise tax on gains above the deduction threshold, so treated as a hybrid | $0 |
| Non-Conforming | California, Pennsylvania, Mississippi, Alabama, + DC (enacted decoupling legislation in November 2025, with emergency provisions taking effect in early December 2025) | No QSBS benefit | Roughly $450,000 to nearly $2 million, depending on the state’s top rate |
| Recent Conformity | New Jersey | Conforms starting 2026 | $0 (if timing aligns) |
Research Insight:
- California founders face the highest total tax burden on QSBS gains, with the state’s 13.3% top rate applying to the full gain amount, adding $1.99 million in state tax on a $15 million QSBS exclusion that saves $3.57 million federally.
- New Jersey’s conformity beginning January 1, 2026, creates timing opportunities for founders to align their exits with the new favorable state treatment while maintaining federal QSBS benefits.
- Washington DC decoupled on November 6th, 2025, and no longer conforms.
- Texas and Florida founders capture the full federal QSBS benefit without state tax complications, making these states increasingly attractive for pre-exit relocation planning.
QSBS Exclusion Percentage Evolution Over Time: 2025
Since its inception, Section 1202 has undergone significant changes in exclusion percentages, with 2025 marking the most founder-friendly rules to date.
| Period | Stock Issue Dates | Exclusion Rate | Holding Period | Key Limitation |
|---|---|---|---|---|
| Original | August 11, 1993 – February 17, 2009 | 50% | 5 years | AMT preference item |
| Enhanced | February 18, 2009 – September 27, 2010 | 75% | 5 years | AMT preference item |
| Current | September 28, 2010 – July 4, 2025 | 100% | 5 years | All-or-nothing |
| New Tiers | After July 4, 2025 | 50%/75%/100% | 3/4/5 years | Graduated benefit |
The 2025 changes represent the most significant expansion of QSBS benefits since the provision’s creation, introducing flexibility that acknowledges the reality of startup exit timelines.
Requesting a Copy of This Report
If you’d like to request a PDF copy of this report or learn more about our specialized QSBS planning and multiplication strategies, you can reach out here.
For founders preparing for a liquidity event or looking to optimize their QSBS structure under the new rules, now is the time to engage in sophisticated tax planning. The difference between an optimized exit and a missed opportunity often traces back to early, strategic planning, especially when navigating the intersection of federal exclusion percentages and state conformity rules.
Connect with our founder to walk through your specific scenario and discover how the expanded QSBS framework can maximize your after-tax proceeds from exit.
Schedule Your QSBS Strategy Discussion
