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QSBS Eligibility & Exclusion Calculator

Section 1202 can exclude millions of dollars of gain from federal tax entirely. It is also the most conditional provision an ordinary shareholder will ever meet: six tests, two entirely different regimes depending on whether you acquired the stock before or after 4 July 2025, and a rate trap in the middle of the new one.

Tax year 2026 Figures final Last verified 2026-07-27 How we verify

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QSBS Eligibility & Exclusion Calculator

Stock options · 2026 · US federal

Your numbers

The single most important field here. OBBBA §70431 rewrote §1202 for stock acquired after that date. Older stock keeps the old rules entirely — there is no partial credit for it.

Measured from the date the stock was issued to you, not from the grant of any option that produced it.

The issuer must be a domestic C corporation when the stock is issued and for substantially all the time you hold it. Stock in an entity that converted to a C corporation only counts from the conversion.

Original issuance is required by §1202(c)(1). Buying shares in a secondary or a tender offer does not produce QSBS, however long you then hold them.

IRC §1202(e)(3) excludes businesses whose principal asset is the reputation or skill of their employees, along with a specific list of industries.

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Aggregate gross assets immediately after issuance, measured at adjusted basis rather than market value — so a company that has raised far more than this figure in valuation terms can still be under it.

The §1202(e)(1) active business requirement. A company holding a very large cash pile relative to its operations can fail it without anyone noticing until a sale.

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What you paid, plus anything already taxed as compensation on the shares. It also drives the ten-times-basis cap, which is the one that matters for founders who paid real money.

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Salary and anything else taxed at ordinary rates. It decides which capital gains band the taxable part of the gain lands in.

A non-conforming state taxes the entire gain at its ordinary rate, however perfect the federal outcome. New Jersey joined the conforming states for tax years beginning in 2026.

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Leave at zero in a state with no income tax.

Advanced inputs
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The per-issuer limit is a lifetime allowance. §1202(b)(1)(A) reduces it by eligible gain taken into account in prior years — the gain counted, not the amount excluded.

Runs entirely in your browser. Nothing you type is sent anywhere, stored, or logged.

Result

Section 1202 verdict Qualifies
Share of gain excluded 100%
Tax saved by qualifying $2,831,020 Against the same sale with no §1202 at all. A negative figure is possible on the partial tiers and is explained below — it is not an error.
Total tax on the sale $0
Issued by a domestic C corporation Pass
Acquired at original issue Pass
Gross assets under the limit at issuance Pass
A qualified trade or business Pass
80% of assets used in the business Pass
Holding period met Pass
Total gain $11,950,000
Your exclusion cap $15,000,000
Gain excluded from federal tax $11,950,000
Section 1202 gain, taxed at 28% $0
Gain above the cap, taxed at 0/15/20% $0
Tax if it did not qualify $2,831,020
Net proceeds after tax $12,000,000
Years to the next exclusion tier Already at the maximum
Extra tax saved by reaching it $0

Estimates for the tax year shown, on the assumptions set out under what this does not model. Educational information, not tax advice.

Line by line
Total gain (proceeds − basis) $11,950,000
Per-issuer dollar cap, less gain already counted $15,000,000
Ten times your cost basis $500,000
Cap applied — the greater of the two $15,000,000
Eligible gain (gain within the cap) $11,950,000
Applicable percentage for your holding period 100%
Excluded from gross income $11,950,000
Section 1202 gain — 28% rate $0
Gain above the cap — 0/15/20% rates $0
Federal tax on section 1202 gain $0
Federal tax on gain above the cap $0
Net investment income tax $0
State tax $0
Total tax on the sale $0
The same sale without §1202 $2,831,020
Difference $2,831,020

Section 1202 is the largest single tax benefit available to someone holding startup equity, and the one most often discovered a year too late. Where it applies, it removes the gain from federal income tax altogether — not deferred, not taxed at a lower rate, simply excluded from gross income. Where it does not apply, it does nothing at all, and there is no partial credit for nearly qualifying.

Two things make 2026 an unusually difficult year to reason about it. The first is that there are now two regimes running side by side. Stock acquired after 4 July 2025 falls under the rules OBBBA §70431 wrote: a tiered exclusion of 50% at three years, 75% at four and 100% at five, a $15,000,000 per-issuer cap and a $75,000,000 gross-asset test. Stock acquired on or before that date keeps the old rules entirely — five years or nothing, $10,000,000, $50,000,000. Which side of a single day in July your shares were issued on can be worth seven figures.

The second is that the new tiers carry a rate trap. The portion the applicable percentage does not exclude is not ordinary long-term capital gain. It is section 1202 gain, which §1(h)(4) taxes at 28% rather than 20% — and which never receives the 0% capital gains band at all. For most sellers the 50% tier is still a large win. For some it is worse than not qualifying, and the calculator will tell you which you are.

Everything on this page is a model of the statute, not an opinion about your shares. The gross-asset history and the active-business record are facts about the company that only the company can confirm, and the eligibility questions above take your answers at face value. Get a letter from the issuer before you rely on any of it.

Background reading: What changed for equity compensation in 2026.

How this is calculated

Six tests decide whether §1202 applies at all. If it does, two caps decide how much gain is eligible, and the applicable percentage decides how much of that is excluded.

  1. The six tests C corporation · original issue · gross assets under the limit · qualified trade · 80% active · holding period All six, conjunctively. Five out of six excludes nothing. The first five are facts about the company and the transaction; only the last is something you can still change.
  2. The applicable percentage acquired after 4 July 2025: 50% at 3 years, 75% at 4, 100% at 5 · acquired before: 100% at 5, nothing sooner The tiers in §1202(a)(5) apply only to newly issued stock. Stock received by gift, at death, or in a §1045 rollover generally inherits the transferor’s acquisition date and therefore the transferor’s regime.
  3. The cap greater of ($15,000,000 − gain already counted for this issuer) and 10 × your cost basis §1202(b)(1) takes the greater, not the sum. The dollar limit is what almost everyone hits; the ten-times-basis alternative matters only where you paid real money for the stock, which is why it is a founder’s clause rather than an employee’s.
  4. Excluded gain eligible gain × applicable percentage Excluded from gross income entirely, so it is also outside modified AGI and outside the net investment income tax.
  5. What the percentage leaves eligible gain × (1 − applicable percentage) → 28% rate gain Taxed through the ordinary rate table with every rate capped at 28%. That ceiling is a real benefit for a top-bracket seller and a real cost for anyone whose gain would otherwise have been in the 0% band.
  6. What the cap leaves gain above the cap → ordinary 0/15/20% long-term rates Not 28%. §1(h)(7) defines section 1202 gain by reference to the percentage limitation in §1202(a); the dollar limit lives in §1202(b) and is a different limitation, so gain displaced by it keeps the ordinary capital gains rates.

A worked example

Sam was issued founder stock in September 2025 — two months after the OBBBA applicable date, which puts the shares squarely under the new tiers. He paid $50,000. Three years later an acquirer offers $12,000,000 for his position, and he has $300,000 of salary in the same year.

All five structural tests pass: a domestic C corporation, stock taken at original issue, gross assets well under $75,000,000, a software business, and assets used in it. At three years the applicable percentage is 50%, so $5,975,000 of his $11,950,000 gain leaves the tax system permanently.

The other half does not become a 20% capital gain. It is section 1202 gain, and because Sam’s salary already carries him past the point where his ordinary rate exceeds 28%, the whole of it is taxed at that 28% ceiling — $1,673,000, plus $227,050 of net investment income tax. Against the $2,831,020 the sale would have cost with no §1202 at all, qualifying at three years has saved him $930,970.

The interesting number is none of those. Holding twelve more months moves him to the 75% tier, which halves the taxed portion and saves a further $950,025 — slightly more than the entire benefit he has accumulated in three years. Whether a deal can wait a year is a business question rather than a tax one, but the price of not waiting is knowable in advance, and this is it.

Figures from verified case three-year-tier-and-the-28-percent-rate
Qualifiestrue
Exclusion Percentage$0.50
Eligible Gain$11,950,000.00
Excluded Gain$5,975,000.00
Section1202 Gain$5,975,000.00
Regular Ltcg Gain$0.00
Federal Tax On1202 Gain$1,673,000.00
Federal Tax On Regular Gain$0.00
Niit Tax$227,050.00
Total Tax$1,900,050.00
Tax If Not Qualified$2,831,020.00
Tax Saved$930,970.00
Years To Next Tier$1.00
Next Tier Percentage$0.75
Extra Tax Saved By Waiting$950,025.00

Both tiers are computed by the module the calculator runs, asserted on every build against a case whose bracket arithmetic was worked by hand.

What this does not model

Every calculator has a boundary. Here is where this one stops — read it before relying on the number.

Questions

My stock was issued in early 2025. Do I get the new tiers?

No. The tiered exclusion, the $15,000,000 cap and the $75,000,000 asset test all apply only to stock acquired after 4 July 2025. Stock acquired on or before that date is governed by the previous rules in full: more than five years of holding, a $10,000,000 per-issuer cap, and a $50,000,000 asset test at issuance.

This is the single most consequential fact about §1202 in 2026 and it is widely misread, because most published summaries lead with the new numbers. There is no transition relief and no proration. At four years, pre-July-2025 stock excludes nothing at all — not 75%.

Why is my saving showing as a negative number?

Because you are on one of the partial tiers and your gain would otherwise have been taxed at 0%. The 0% capital gains band runs to roughly $49,450 of taxable income for a single filer, and a gain sitting inside it costs nothing. Section 1202 gain does not get that band — it is taxed through the ordinary rate table, capped at 28% — so excluding half your gain and taxing the rest at 10% or 12% can cost more than taxing all of it at nothing.

It is a narrow case, confined to modest gains and modest incomes, and it disappears entirely at the five-year mark where the exclusion reaches 100%. But it is real, it is the direct consequence of how §1(h)(7) is written, and it is a reason not to rush a sale to the three-year line.

Is gain above the cap taxed at 28% as well?

No — it keeps the ordinary 0/15/20% long-term rates, and the distinction is worth a great deal on a large sale. Section 1202 gain is defined in §1(h)(7) as the gain that *would* have been excluded but for the percentage limitation in §1202(a). The per-issuer dollar cap is a different limitation, in §1202(b), so gain displaced by it is never section 1202 gain.

On a $46,000,000 gain with $40,000,000 excluded, the $6,000,000 remainder is taxed at 20% rather than 28% — a difference of roughly $480,000. Very little published commentary addresses this point, most of it discussing only the within-cap partial exclusion, so it is worth reading the two subsections yourself before accepting a bigger number from anyone.

What is the ten-times-basis cap actually for?

It is the alternative limit in §1202(b)(1)(B), and §1202 lets you take whichever of the two is greater. Ten times your aggregate adjusted basis in the stock disposed of during the year will beat the dollar cap whenever your basis exceeds $1,500,000 under the new rules, or $1,000,000 under the old ones.

That makes it a provision for people who paid real money — founders who bought stock at a meaningful valuation, or investors. An employee who exercised at a low strike has a tiny basis and will effectively never reach it. If you early-exercised and filed an 83(b) election, note that the compensation income you recognised then is part of your basis now.

Does the 83(b) election affect my QSBS clock?

Very much so. The five-year holding period runs from when the stock was issued to you, and for restricted stock that acquisition happens at grant if you filed an 83(b) election and at each vesting date if you did not. On a four-year vest, filing the election can be the difference between a clean five-year hold and a final tranche that misses the mark by four years.

This is the largest single argument for the election that the tax on the election itself never captures, and it is why the two questions should be answered together rather than in sequence.

I bought my shares in a secondary. Do they qualify?

No. §1202(c)(1) requires the stock to have been acquired at its original issue, in exchange for money, property or services. Buying shares from a departing employee or in a tender offer produces ordinary stock however small the company was and however long you then hold it.

There are narrow exceptions where the holding is transferred rather than purchased — gift, death, and distribution from a partnership — and in those cases §1202(h) lets you inherit both the QSBS character and the transferor’s holding period. Buying is not one of them.

My state taxes the gain anyway. Which ones do that?

California, Pennsylvania, Mississippi and Alabama do not recognise the exclusion and tax the full gain at their ordinary rates. California is the significant one for this audience: it repealed its QSBS provisions outright, applies that to residents and to non-residents with California-sourced income, and has a top rate of 13.3%.

New Jersey moved into conformity for tax years beginning on or after 1 January 2026, which is a genuine change from what most older guidance says. Set the conformity question above to match your own state and the calculator will show you the federal and state answers separately, because in a non-conforming state they can point in different directions.

Is there still an AMT problem with QSBS?

Not for any stock a startup employee holds today. §57(a)(7) used to treat 7% of the excluded gain as an alternative minimum tax preference item. OBBBA rewrote it so it now applies only to stock acquired on or before 27 September 2010.

It is worth being precise about why, because the change is easy to read backwards. The old §1202(a)(4)(C) contained a carve-out saying the preference did not apply to fully excluded stock, and that carve-out was indeed removed in 2025 — but only because the same limitation was moved into §57(a)(7) itself and stated as a date. The effect is narrower, not broader.

Is anything I enter here sent anywhere?

No. The calculation is a static JavaScript module running in your browser with no network request. Your company’s asset figures, your basis and your sale price never leave your device, nothing is stored between visits, and there is no account or email gate on the result.

Sources

Every rate and threshold used above traces to one of these. We cite the statute, the regulation, or the IRS directly — never another commentary site.

This page is educational information, not tax, legal or investment advice, and using it creates no professional relationship. Equity compensation interacts with the rest of your return in ways a single calculator cannot see. Before acting on a figure of any size, take it to a qualified tax adviser.