QSBS Section 1202 Exclusion Guide: Startup Stock Tax Rules in 2026

Qualified Small Business Stock, or QSBS, can let you exclude part or all of the gain when you sell shares in a qualifying startup, under IRC Section 1202. How much you exclude depends on when you acquired the stock: legacy rules set the exclusion at 50%, 60%, 75%, or 100% of the gain. Whatever is excluded comes out of federal income entirely. Whatever is left is taxable, and that taxable portion of Section 1202 gain is subject to a maximum 28% rate rather than the usual 15% or 20%. Eligibility is the hard part. It rests on a stack of tests covering the company, the stock, and your holding period, and missing any one of them can void the exclusion.

This is an educational guide. The calculator gives a federal estimate and accepts a verified exclusion amount. It does not determine whether your stock qualifies. Confirm any QSBS position with a tax professional.

What Qualified Small Business Stock is

QSBS is stock in a small domestic C corporation that you acquired at original issuance and held long enough to meet the Section 1202 holding period. The point of the rule is to reward people who put money into young operating companies and hold for years. The reward is a capital-gains exclusion that can reach 100% of the gain, subject to a per-issuer cap.

The eligibility checklist

Every one of these has to be true. They are not optional, and they are where most QSBS claims fall apart:

C corporation stock. The issuer must be a domestic C corporation, both when the stock is issued and through substantially all of your holding period.
Original issuance. You must have acquired the stock directly from the company in exchange for money, property, or services, not bought it from another shareholder.
Qualified business. The company cannot be in an excluded field such as most professional services, finance, farming, hospitality, or mining.
Active business requirement. At least 80% of the company’s assets must be used in the active conduct of a qualified business.
Gross assets test. The company’s gross assets must have been at or below the statutory ceiling at the time the stock was issued.
Holding period. You must hold the stock long enough to meet the Section 1202 requirement before selling.

The legacy 50%, 60%, 75%, and 100% tiers

The exclusion percentage is set by when you acquired the stock. Over the years Congress raised it in steps, so older stock can carry a smaller exclusion:

50% for the oldest qualifying stock.
60% for certain empowerment zone businesses.
75% for a middle window of acquisition dates.
100% for stock acquired in the most recent window.

This is why acquisition date matters so much. Two founders with identical companies can face very different tax simply because one received stock a year earlier than the other.

The 28% interaction for partial exclusions

When the exclusion is less than 100%, the part of the gain that remains taxable is Section 1202 gain, and it sits in the 28% rate group on Schedule D. So a partial exclusion does not give you the usual 15% or 20% long-term rate on the taxable slice. It gives you a rate of up to 28% on that slice. A 100% exclusion leaves nothing taxable, so the 28% question never comes up.

A worked example: a 75% exclusion

Take a founder who sells QSBS for a $500,000 gain on stock that qualifies for the 75% tier.

Exclude 75%, or $375,000, from federal income entirely.
The remaining $125,000 is the taxable portion. As Section 1202 gain it falls in the 28% rate group, so it is taxed at up to 28%, which is up to $35,000. It can be less if your ordinary rate sits below 28%.
A 100% exclusion on the same gain would leave nothing taxable. A 50% exclusion would leave half the gain taxable at up to 28%.

The calculator has a 50/60/75/100 tier selector so you can estimate this, but partial-exclusion math is exactly the kind of mixed case to confirm with a professional before you rely on it.

Use the Capital Gains Calculator to estimate the tax on the taxable portion of a verified QSBS gain.

AMT, Section 1045 rollovers, and the California warning

A few more pieces are worth knowing at a high level. Certain legacy partial exclusions carry an Alternative Minimum Tax preference on part of the excluded gain, so the exclusion is not always perfectly clean. A Section 1045 rollover lets you defer gain by reinvesting QSBS proceeds into new QSBS within 60 days, which can keep a holding period alive. And California is the big state warning: it does not conform to the federal QSBS exclusion, so a gain that is largely federal tax-free can still be fully taxable by California. The calculator’s California estimate adds the federally excluded amount back into the state base for this reason.

Important update: stock acquired after July 4, 2025

The 2025 tax law, the One Big Beautiful Bill Act, created a newer QSBS framework for stock acquired after July 4, 2025. It adds a tiered holding-period schedule and raises the size caps, which changes the math for recently issued stock. This article focuses on the established 50/60/75/100 framework that covers most stock sold today. Treat the post-July-2025 rules as still settling, and review your position against current IRS forms and guidance whenever you sell newer stock.

Open the Capital Gains Calculator to model a QSBS sale as an estimate alongside your other gains.

Sources

Last reviewed: June 21, 2026.

Frequently Asked Questions

What is the QSBS Section 1202 exclusion?

It is a capital-gains exclusion for Qualified Small Business Stock. If your stock meets the Section 1202 tests, you can exclude 50%, 60%, 75%, or 100% of the gain depending on when you acquired it. The excluded portion comes out of federal income, and the taxable portion is subject to a maximum 28% rate.

Why is QSBS taxed at 28% instead of 15%?

When the exclusion is less than 100%, the part of the gain that stays taxable is Section 1202 gain, which the law places in the 28% rate group rather than the regular 0%, 15%, or 20% long-term brackets. A 100% exclusion leaves nothing taxable, so the 28% rate does not apply.

Does California recognize the QSBS exclusion?

No. California does not conform to the federal Section 1202 exclusion, so a gain that is largely tax-free for federal purposes can still be fully taxable in California. Plan for the state tax separately.