If you’re a founder sitting on Qualified Small Business Stock (QSBS) that could generate a $20 million, $40 million, or $100 million personal exit, you already know about Section 1202’s federal tax exclusion and potentially about QSBS stacking. What catches most founders off guard is that your state might not honor that exclusion.
On a $40 million gain, the difference between a conforming and non-conforming state can be significant. This isn’t theoretical. I’ve watched California-based founders celebrate their federal QSBS exclusion, only to realize they’re still writing a significant check to the CA Franchise Tax Board.
Meanwhile, founders in conforming states such as New York generally receive the same exclusion at the state level that they receive federally. While New York has one of the highest state (and New York City) income tax rates in the country, it follows federal Section 1202 treatment. That means if the gain is excluded federally, it is generally excluded from New York taxable income as well. The difference is not that New York is a low-tax state, but that it respects the federal QSBS exclusion while California does not.¹
The following guide provides the most current state-by-state conformity data for 2026, a detailed analysis of three states (California, New York, and the newly conforming New Jersey), and specific planning strategies for founders in nonconforming jurisdictions.
Understanding State “Conformity” vs. “Non-Conformity”
When we say a state “conforms” to Section 1202, we mean the state tax code respects the federal QSBS exclusion. If you exclude $10 or $15 million of gain from federal income tax, you also exclude it from state income tax. When a state “does not conform,” the state does not provide the same exclusion as federal law. As a result, some or all of the gain may remain taxable at the state level, even though it is excluded federally.²
The Math Is Real
A California founder with $10 million in qualifying QSBS gain pays:
- Federal: $0 (assuming full exclusion and holding period applies)
- California: $1.33 million (13.3% top rate on $10M)
The same founder in a conforming state or in a no-income-tax state (e.g., Florida, Texas, Nevada) generally pays $0 at both the federal and state level.
Complete State-by-State QSBS Conformity Map (2026)
Important: State conformity laws change. Always confirm current treatment before closing a transaction.
Important Note on OBBBA Changes (Effective July 5, 2025):
The One Big Beautiful Bill Act (OBBBA), signed into law on July 4, 2025, increased the aggregate gross assets threshold from $50 million to $75 million (indexed for inflation beginning in 2027) and increased the per-issuer exclusion cap from $10 million to $15 million (also indexed for inflation beginning in 2027) for stock issued on or after July 5, 2025.
States with ‘rolling conformity’ to the IRC generally adopt these changes automatically. States with ‘static conformity’ (conforming to the IRC as of a specific date) may require legislative updates. Confirm your state’s conformity date and treatment before relying on these rules.
| State | QSBS Treatment | Top Capital Gains / Income Rate | Notes |
|---|---|---|---|
| Alabama | No Conformity | 5.0% | Does not recognize Section 1202³ |
| Alaska | No Income Tax | 0% | No state income tax |
| Arizona | Full Conformity | 2.5% flat | Honors federal exclusion |
| Arkansas | Full Conformity | 5.5% | Honors federal exclusion |
| California | No Conformity | 13.3% | Explicit statutory rejection of IRC §1202⁴ |
| Colorado | Full Conformity | 4.55% flat | Honors federal exclusion |
| Connecticut | Full Conformity | 7.0% | Honors federal exclusion |
| Delaware | Full Conformity | 6.6% | Honors federal exclusion |
| Florida | No Income Tax | 0% | No state income tax |
| Georgia | Full Conformity | 5.75% | Honors federal exclusion |
| Hawaii | Partial Conformity | 7.25% | Limited recognition under Haw. Rev. Stat. §235-2.45(e)⁵ |
| Idaho | Full Conformity | 5.8% | Honors federal exclusion |
| Illinois | Full Conformity | 4.95% flat | Honors federal exclusion |
| Indiana | Full Conformity | 3.0% flat | Honors federal exclusion |
| Iowa | Full Conformity | 3.8% flat | Honors federal exclusion |
| Kansas | Full Conformity | 5.7% | Honors federal exclusion |
| Kentucky | Full Conformity | 4.5% flat | Honors federal exclusion |
| Louisiana | Full Conformity | 3.0% flat | Honors federal exclusion |
| Maine | Full Conformity | 7.15% | Honors federal exclusion |
| Maryland | Full Conformity | 5.75% | Honors federal exclusion |
| Massachusetts | Full Conformity | 5.0% (LT) | Conforms to §1202. Massachusetts adopted rolling conformity to the IRC as of January 1, 2022 (previously static conformity as of January 1, 2005). QSBS gain excluded federally is generally excluded from Massachusetts income. See TIR 23-5 for details.⁶ |
| Michigan | Full Conformity | 4.05% flat | Honors federal exclusion |
| Minnesota | Full Conformity | 9.85% | Honors federal exclusion |
| Mississippi | No Conformity | 5.0% | Does not recognize Section 1202³ |
| Missouri | Full Conformity | 4.7% flat | Honors federal exclusion |
| Montana | Full Conformity | 4.1% | Honors federal exclusion |
| Nebraska | Full Conformity | 5.2% | Honors federal exclusion |
| Nevada | No Income Tax | 0% | No state income tax |
| New Hampshire | No Broad Income Tax | 0% | No general wage income tax |
| New Jersey | Full Conformity (2026+) | 10.75% | Conforms beginning tax years 1/1/2026⁷ |
| New Mexico | Full Conformity | 5.9% | Honors federal exclusion |
| New York | Full Conformity | 10.9% | Follows federal exclusion¹ |
| North Carolina | Full Conformity | 4.25% flat | Honors federal exclusion |
| North Dakota | Full Conformity | 2.5% | Honors federal exclusion |
| Ohio | Full Conformity | 3.75% | Honors federal exclusion |
| Oklahoma | Full Conformity | 4.75% | Honors federal exclusion |
| Oregon | Full Conformity | 9.9% | Honors federal exclusion |
| Pennsylvania | No Conformity | 3.07% flat | No state equivalent to §1202⁸ |
| Rhode Island | Full Conformity | 5.99% | Honors federal exclusion |
| South Carolina | Full Conformity | 6.4% | Honors federal exclusion |
| South Dakota | No Income Tax | 0% | No state income tax |
| Tennessee | No Income Tax | 0% | No state income tax |
| Texas | No Income Tax | 0% | No state income tax |
| Utah | Full Conformity | 4.65% flat | Honors federal exclusion |
| Vermont | Full Conformity | 8.75% | Honors federal exclusion |
| Virginia | Full Conformity | 5.75% flat | Honors federal exclusion |
| Washington | No Broad Income Tax | 0% (general) | State capital gains tax applies above $250K, but federally excluded QSBS gain is not subject to WA capital gains tax.⁹
Note: Washington is considering a new 9.9% state income tax on individuals earning over $1 million per year (the “Millionaire’s Tax”). If enacted, this could materially change the tax treatment of QSBS gains for Washington residents. Monitor legislative developments closely. |
| District of Columbia | No Conformity (2025+) | 10.75% | DC decoupled from IRC §1202 effective December 20, 2025. QSBS gains are now fully taxable at DC’s ordinary income rates (up to 10.75%). This represents a major policy shift from prior conformity. DC founders should model full DC tax exposure on QSBS gains.¹² |
| West Virginia | Full Conformity | 4.92% | Honors federal exclusion |
| Wisconsin | Full Conformity | 7.65% | Honors federal exclusion |
| Wyoming | No Income Tax | 0% | No state income tax |
Deep Dive: California Founders (Non-Conforming)
California presents the most expensive QSBS tax trap in America. California Revenue & Taxation Code §18152 explicitly states that IRC §1202 does not apply for California income tax purposes.⁴ California treats QSBS gains as fully taxable capital gains subject to its top 13.3% rate.
Residency Planning
California residency is determined under a facts-and-circumstances test evaluating domicile, time in state, family location, business activity, and intent.¹¹ Relocating shortly before a liquidity event materially increases audit risk. Residency changes must reflect permanent lifestyle shifts, not temporary tax positioning.
Non-Grantor Trust Strategy (High Complexity — Expert Counsel Required)
If properly structured as a completed-gift, non-grantor trust for federal tax purposes, administered outside California, with no California trustees and no California non-contingent beneficiaries, a Nevada (or other non-California) trust may avoid California income tax on QSBS gain.
Under California law, trust taxation depends primarily on the residency of trustees and non-contingent beneficiaries. If California residents serve as trustees or hold non-contingent interests, some or all of the trust’s income may be subject to California tax. QSBS gain is generally sourced to the taxpayer’s residence. Accordingly, a properly structured non-grantor trust with no California trustees, no California non-contingent beneficiaries, and no California-source income may reduce or eliminate California tax on its share of the gain.
Critical Warning: California trust residency and sourcing rules are highly technical, fact-specific, and aggressively audited by the California Franchise Tax Board. The presence of even one California trustee or one non-contingent California beneficiary can cause the entire trust to be taxed in California. This strategy requires experienced SALT counsel and must be implemented well in advance of any liquidity event. Do not attempt this without expert guidance.
Transfers made after a binding acquisition agreement, board approval, letter of intent, or when a sale is reasonably certain may be challenged under the assignment of income doctrine. Best practice: Transfer QSBS to appropriately structured non-grantor trusts well before any binding agreement or liquidity event is reasonably foreseeable, and structure multiple trusts thoughtfully in light of IRC §643(f), the multiple-trust anti-abuse rule.
Deep Dive: New York (Conforming)
New York follows federal Section 1202 treatment. A QSBS gain excluded federally is generally excluded from New York taxable income as well.¹ For NYC residents, this conformity also applies to New York City personal income tax.
Deep Dive: New Jersey (2026 Update)
On June 30, 2025, Governor Phil Murphy signed A4455/S4503 into law, bringing New Jersey into conformity with federal QSBS treatment for tax years beginning on or after January 1, 2026. This means that QSBS gain recognized in calendar year 2026 or later will generally be excluded from New Jersey gross income to the same extent it is excluded federally. Gain recognized in 2025 remains fully taxable in New Jersey.⁷
New Jersey’s conformity generally follows the amount of gain excluded for federal purposes, including federal changes that increase the per-issuer exclusion amount for certain stock issued after July 4, 2025.⁷
Deep Dive: District of Columbia (2025 Decoupling — Major Change)
Critical Update: On December 20, 2025, the District of Columbia enacted emergency and temporary legislation decoupling from IRC §1202, effective immediately for the 2025 tax year and forward.¹²
DC previously conformed to federal QSBS treatment, but the DC Council voted to decouple as part of broader revenue protection measures in response to the OBBBA. This means:
- QSBS gains are now fully taxable in DC at ordinary income rates (up to 10.75%)
- The exclusion applies to all QSBS gains recognized in 2025 and later, regardless of when the stock was acquired
- DC joins California, Pennsylvania, Alabama, and Mississippi as non-conforming jurisdictions
Planning Implications for DC Founders:
DC founders planning exits should immediately model full DC tax exposure on QSBS gains. A DC resident with $10 million in qualifying QSBS gain now faces:
- Federal: $0 (assuming full exclusion and holding period applies)
- DC: $1.075 million (10.75% top rate on $10M)
This represents a material change from prior law and significantly impacts DC-based founders in the venture ecosystem. Consider bona fide residency relocation well in advance of liquidity events, or evaluate trust-based strategies with experienced SALT counsel.
Note: This legislation is currently subject to Congressional review under DC’s Home Rule framework. Federal lawmakers have introduced resolutions to overturn DC’s decoupling decision. Monitor legislative developments closely, as the conformity status could change again in 2026.
Planning Recommendations for Non-Conforming States
If you are a founder in California, Pennsylvania, Mississippi, Alabama, or the District of Columbia:
- Model your state tax exposure early.
- Consider bona fide permanent residency relocation well in advance of liquidity.
- Evaluate non-grantor trust strategies.
- Avoid last-minute transfers.
- Maintain documentation from original issuance forward.
About Keystone Global Partners
Keystone Global Partners specializes in QSBS planning for venture-backed founders facing eight- and nine-figure liquidity events. We work with founders 18-36 months before anticipated exits to implement residency strategies, trust structures, and state tax optimization.
If you’re a founder with qualifying QSBS and a potential exit on the horizon, we can model your specific state tax exposure and design a customized plan to maximize your after-tax proceeds.
Schedule a Confidential QSBS State Tax Strategy Consultation
Footnotes
¹ New York State Department of Taxation & Finance, conformity to federal taxable income framework; general practitioner summaries confirm NY follows federal §1202 treatment.
² Internal Revenue Code §1202; state conformity depends on each state’s conformity statute.
³ Multi-state practitioner surveys of QSBS conformity, including summaries identifying AL, MS, and PA as non-conforming jurisdictions.
⁴ California Revenue & Taxation Code §18152.
⁵ Haw. Rev. Stat. §235-2.45(e).
⁶ Massachusetts DOR Technical Information Release 23-5 (IRC conformity framework including §1202).
⁷ New Jersey Bill A4455/S4503 (signed June 30, 2025), effective tax years beginning January 1, 2026.
⁸ Pennsylvania Department of Revenue guidance confirming no equivalent to IRC §1202 exclusion.
⁹ Washington Department of Revenue, Capital Gains Tax FAQ confirming federally excluded §1202 gain not subject to WA capital gains tax.
¹⁰ Wisconsin legislative history and practitioner summaries regarding partial exclusion and subsequent conformity updates; confirm current statutory treatment.
¹¹ California residency determination under facts-and-circumstances test; see Appeal of Bragg (1985) and related FTB guidance.
¹² District of Columbia “D.C. Income and Franchise Tax Conformity and Revision Temporary Amendment Act of 2025” (Act 26-217), enacted December 20, 2025, effective for tax years beginning January 1, 2025. Thomson Reuters Tax & Accounting, December 31, 2025; ITEP analysis, February 2026.
State tax conformity rules are subject to legislative change. Readers should confirm current treatment before relying on any planning strategy described above.
