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QSBS (Section 1202)
QSBS
QSBS (Section 1202): the complete guide
Qualified small business stock can erase the federal tax on a startup-stock sale, sometimes the whole thing. This is the full story: which rules apply to your shares, how the exclusion is sized, the holding clock, and the per-issuer cap that decides how much you actually shelter.
How people accidentally blow their QSBS
Most QSBS gets lost by accident, not by bad luck. A redemption, an early sale, the wrong entity, a secondary purchase, or missing records can quietly kill a break worth more than the mistake ever felt at the time.
Planning around QSBS: setup, stacking, and the 1045 rollover
The QSBS exclusion is mostly decided at the moment you get the stock, not the moment you sell. This is the planning playbook: lock in qualification early, multiply the cap with gifts and trusts, and use a Section 1045 rollover to rescue a forced early exit.
Reporting a QSBS exclusion on your return
The QSBS break is not automatic on your tax return. You report the full sale, then back the exclusion out with the right code, or the gain stays taxed.
Case study: a founder's QSBS exit, mostly tax-free
Five years held, the qualified small business stock exclusion claimed, and a large chunk of the gain off the table. The win was set up at incorporation, not at the sale.
Does your state honor the QSBS exclusion
QSBS is a federal break, and states get a vote. California taxes the gain in full while New York generally follows the federal exclusion, so the same sale can split two ways.
QSBS and California
California ignores the QSBS exclusion entirely. A gain the IRS lets you exclude in full is taxed at up to 13.3 percent by California, and the only real fix is residency, set up years before you sell.