US QSBS Calculator: Section 1202 Capital Gain Exemption

QSBS exclusion (Section 1202): working out tax on a startup exit

Section 1202 exempts from federal tax all or part of the gain on US C-Corporation shares held for at least 5 years, up to the greater of $10M or 10 times the purchase price. The tool applies a 100% exclusion to shares acquired after 27/09/2010 and taxes the rest at 23.8%. Note that it does not yet reflect the 04/07/2025 reform (tiers from 3 years, $15M cap).

How the tool calculates

• Gain = sale proceeds − acquisition cost.
• Eligibility: C-Corporation, gross assets ≤ $50M at issuance, qualified business, held for at least 5 years.
• Exclusion = min(gain; max($10M; 10 × cost)) × rate: 100% after 27/09/2010, 75% between 18/02/2009 and 27/09/2010, 50% before.
• Federal tax = gain above the cap × 23.8% (20% + 3.8% NIIT); with a 50% or 75% exclusion, the non-excluded part below the cap is taxed at 31.8% (28% rate + 3.8% NIIT). Example: 2009-2010 shares bought for $100,000 and sold for $1,100,000 leave $250,000 non-excluded, i.e. $79,500 of federal tax.
• State tax: California (13.3%) and New York (10.9%) tax the whole gain; elsewhere, only the non-excluded part.

Example with the default values

Cost of $100,000, sale for $12,000,000, held 5.5 years: a gain of $11,900,000, of which $10,000,000 is excluded. Federal tax: 1,900,000 × 23.8% = $452,200 instead of $2,832,200, saving $2,380,000. In California, $1,582,700 of state tax is added: $2,034,900 in total, an effective rate of 17.1%. In Texas the rate drops to 3.8%.

Limits

• Shares acquired after 04/07/2025: the law provides a 50% exclusion at 3 years, 75% at 4 years and 100% at 5 years, a $15M cap and a $75M asset threshold; the tool does not handle them.
• Washington is taxed at 7% on the whole gain, without the standard deduction or the 9.9% rate above one million in force since 2025. Other state rules are indicative.

Sources and dates: Internal Revenue Code, section 1202; P.L. 119-21 of 04/07/2025, section 70431; Washington Department of Revenue, 7% and 9.9% rates on 2025 capital gains (checked 14/10/2026). An estimate, not a substitute for a tax adviser.

Frequently Asked Questions

What are the conditions for the QSBS exclusion?

The shares must have been issued by a US C-Corporation whose gross assets did not exceed $50M at issuance ($75M for shares issued after 04/07/2025), running a qualified business, and acquired at original issue. They must be held for more than 5 years, or at least 3 years for shares acquired after 04/07/2025. S-Corporations and LLCs do not qualify.

What is the Section 1202 cap on excluded gain?

The greater of $10M or 10 times the purchase price, per issuing company. For shares acquired after 04/07/2025 the fixed amount rises to $15M, indexed for inflation from 2027. With $100,000 invested and a $12M sale, the tool excludes $10M and taxes $1.9M.

What did the 4 July 2025 law change for QSBS?

For shares acquired after 04/07/2025, the exclusion becomes tiered: 50% after 3 years, 75% after 4 years and 100% after 5 years (section 70431 of P.L. 119-21). The cap rises to $15M and the asset threshold to $75M. Older shares keep the previous rules, which are the only ones the tool applies.

Does California apply the QSBS exclusion?

No: California does not follow Section 1202 and taxes the whole gain at its own rates, up to 13.3% in the tool. In the default example this adds $1,582,700 of state tax while federal tax falls to $452,200. The treatment of other states, including New York, is shown by the tool for guidance only.

Is this tool really free?

Yes, all tools on Kristools are 100% free and accessible without registration.

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