QSBS §1202 Exclusion 2026 Calculator — 100% Gain Exclusion

Qualified Small Business Stock (QSBS) under IRC §1202 lets founders and early investors in C-corporations exclude up to 100% of federal capital gains on stock held more than 5 years. The exclusion cap per issuer is the greater of $10 million or 10× the original adjusted basis. For stock acquired after September 27, 2010, the gain is also exempt from the 3.8% Net Investment Income Tax — making §1202 one of the most powerful tax breaks in the US tax code.

Five Qualification Tests

To qualify under §1202, ALL of these must be true: (1) Domestic C corporation — S-corps, LLCs, and partnerships do not qualify. (2) Gross assets ≤ $50 million at all times before AND immediately after stock issuance. (3) Active business test — at least 80% of assets used in a qualifying trade or business. Excluded fields: health, law, accounting, consulting, financial services, brokerage, farming, hospitality (hotels, restaurants), and any business whose principal asset is the reputation or skill of employees. (4) Original issuance — you must acquire stock directly from the company (not on a secondary market). (5) Five-year holding period as of the sale date.

The 100% / 75% / 50% Exclusion Tiers

The exclusion percentage depends on when the stock was acquired: 100% for stock acquired after September 27, 2010 (no AMT preference, no NIIT). 75% for stock acquired between February 18, 2009 and September 27, 2010. 50% for stock acquired before February 18, 2009 (28% rate applies to the taxable portion under §1(h)(4), and 7% AMT preference applies). Most modern founders and angel investors hold the 100% tier. The 50% and 75% tiers still occasionally surface in old grants and conversions.

The Per-Issuer Cap

The §1202 exclusion is capped at the greater of $10 million OR 10× the taxpayer's adjusted basis in the qualifying stock — per issuer, per taxpayer. For a founder with $100K of basis, that's $10M (the floor). For a founder who contributed $5M of appreciated IP, that's $50M (10× basis). Stacking strategies: gift QSBS shares to family members or non-grantor trusts (each gets their own $10M cap), or sell across multiple tax years to use multiple per-year inclusions on §1045 rollovers. Aggressive planning needs counsel — the IRS scrutinizes trust stacking.

Common QSBS Mistakes

(1) Wrong entity — Delaware LLCs converted to C-corp reset the QSBS clock only on the conversion date, not the original LLC formation. (2) Active business test failure — if the company holds excess cash (>50% non-business assets), it can fail the 80% test. (3) Buying on the secondary market — only original-issuance shares qualify. (4) Forgetting state non-conformity — California, Pennsylvania, New Jersey, Mississippi, and Alabama do NOT conform to §1202 — you'll owe full state tax on the federally excluded gain. (5) Not using §1045 rollover — if you sell QSBS held less than 5 years, you can roll proceeds into new QSBS within 60 days and preserve the holding period.

Last updated May 2026. Sources: IRC §1202, IRS Publication 550, IRS Notice 2018-18.