QSBS Section 1202 Exclusion Calculator

Frequently Asked Questions

What qualifies as QSBS under Section 1202?

The stock must be from a domestic C corporation with gross assets under 50 million dollars at issuance, acquired as original issue stock (not bought on a secondary market), held for more than five years, and the company must operate in a qualifying active business. Professional services, finance, and hospitality are excluded industries.

Is the Section 1202 exclusion subject to the alternative minimum tax?

The 100 percent exclusion tier (for stock acquired after September 27, 2010) is not subject to AMT add-back. The older 50 and 75 percent tiers included a portion of the excluded gain as an AMT preference item, which could create an AMT liability even though the gain was excluded from regular tax.

Can I use the exclusion if I bought QSBS on a secondary market?

No. Section 1202 requires that the stock be acquired as original issue directly from the corporation. Shares purchased from another investor, including in secondary transactions on platforms like Forge or Nasdaq Private Market, do not qualify.

Does California recognize the QSBS exclusion?

No. California does not conform to the federal Section 1202 exclusion and taxes the entire gain at the applicable California rate, which can be as high as 13.3 percent for high earners. This can result in a significant state tax bill even when federal tax is zero.

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How This Calculator Works

Section 1202 of the Internal Revenue Code lets investors exclude a significant portion of the gain from selling qualified small business stock (QSBS) from federal income tax. The exclusion is capped at the greater of ten million dollars or ten times your original cost basis. Within that cap, the exclusion percentage depends on when you originally acquired the stock. Shares acquired after September 27, 2010 generally qualify for a 100 percent exclusion of the gain up to the cap, while earlier acquisitions qualify for 50 or 75 percent.

The calculator finds your total gain, applies the exclusion cap, applies the appropriate exclusion percentage, and estimates the excluded and remaining taxable portions.

How To Use It

Enter your original cost basis, the total sale proceeds, and the exclusion percentage that applies to your acquisition date. The result shows the total gain, the maximum exclusion cap, the amount excluded from federal tax, and the taxable gain that remains.

Key Eligibility Requirements

The stock must be from a domestic C corporation, not an LLC, S-corp, or partnership.

You must have held the stock for more than five years.

The corporation's aggregate gross assets must not have exceeded 50 million dollars at the time of issuance and immediately after.

The corporation must be in a qualifying active business trade, excluding fields such as financial services, law, health, hospitality, and professional sports.

The stock must have been acquired as original issue, not purchased on a secondary market.

Exclusion Percentage by Acquisition Date

Shares acquired before February 18, 2009 qualify for a 50 percent exclusion of gain up to the cap. Shares acquired from February 18, 2009 through September 27, 2010 qualify for a 75 percent exclusion. Shares acquired after September 27, 2010 qualify for a 100 percent exclusion. The 100 percent exclusion means zero federal capital gains tax on the excluded portion, which is the most favorable treatment available to any form of capital gain under US tax law.

State Tax Treatment

The federal exclusion is powerful, but state tax treatment varies significantly. California, for example, does not conform to the federal Section 1202 exclusion and taxes the full gain at ordinary income rates for state purposes. New York partially conforms. Several other states follow federal treatment and provide the same exclusion at the state level. If you are a California resident holding QSBS, the state tax bill on a large gain can be substantial even when federal tax is fully excluded. Consult a tax advisor familiar with your state's conformity rules before relying on QSBS treatment for financial planning.

Exclusion Stacking

Each taxpayer gets a separate exclusion cap. An investor who gifts QSBS shares to multiple family members or transfers shares to grantor trusts before a sale can multiply the total excluded gain by the number of qualifying holders. This strategy, commonly called exclusion stacking, requires careful advance planning and must be executed well before any sale is contemplated. Transfers made in anticipation of a known sale may be challenged by the IRS. This is a strategy that should only be implemented with qualified legal and tax counsel.

Limitations and Disclaimer

This calculator estimates federal income tax impact only. It does not account for alternative minimum tax (AMT), which historically applied to the 50 and 75 percent exclusion tiers and added back a portion of the excluded gain as an AMT preference item. The 100 percent exclusion tier is not subject to AMT preference add-back. It also does not account for net investment income tax, state taxes, or the impact of the gain on other deductions and phase-outs. This is a planning estimate only. Consult a qualified tax advisor before making decisions based on QSBS treatment.

QSBS Section 1202 Exclusion Calculator

Frequently Asked Questions

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