Backing a young company is risky, and many startups never deliver a return to the people who fund them. To encourage that risk taking, Congress created a tax incentive in 1993 that rewards those who take the risk and help a company grow. Section 1202 of the Internal Revenue Code allows non-corporate investors and founders to exclude a substantial portion, or potentially all, of their capital gains from federal income tax when selling stock. This is known as Qualified Small Business Stock, or QSBS. For families with significant wealth tied to a privately held business, the exclusion can be one of the more valuable provisions in the tax code; a single successful sale of qualifying stock may shelter millions of dollars of gain. The rules are technical, however. The benefit depends on how the stock was acquired, what kind of company issued it and how long it was held. This overview first explains the core requirements then turns to planning strategies that can extend the benefit further.

Key Requirements and Structure

• Eligible Taxpayers: Available to individuals, trusts and estates. Partnerships and S corporations may also pass the benefit through to their individual owners under specific conditions.
  
• Original Issuance: Stock must be acquired directly from a domestic C-corporation at its original issuance, rather than purchased from another shareholder on the secondary market. While the stock cannot be purchased on the secondary market, QSBS status and the holding period do carry over if the stock is transferred via gift or inheritance.
  
• Asset Threshold: For stock issued after July 4, 2025, the corporation’s aggregate gross assets cannot exceed $75 million at all times before the issuance and immediately after the issuance. The limit was previously $50 million.
  
• Active Business Requirement: During substantially all the holding period, at least 80% of the corporation’s assets must be used in the active conduct of a qualified trade or business. Businesses in fields such as law, medicine, consulting, financial services and hospitality are excluded.
  
• Holding Period and Exclusion Levels:
  • Pre-July 4, 2025 stock: Requires a 5+ year holding period for up to a 100% gain exclusion (the full 100% applies to stock acquired after September 27, 2010; earlier issuances are limited to 50% or 75% exclusions).
  • Post-July 4, 2025 stock: Under the 2025 legislation, known as the One Big Beautiful Bill Act, the exclusion is tiered, allowing a 50% exclusion at three years, a 75% exclusion at four years and a 100% exclusion at five or more years.
• Gain Caps: The maximum exclusion per taxpayer per issuer is limited to the greater of a $10 million cumulative lifetime cap ($15 million for post-July 4, 2025 stock) OR an annual cap equal to ten times the aggregate adjusted basis of the stock sold during that specific tax year. Basis generally refers to what the investor paid for the shares.

While Section 1202 is a federal tax incentive, each state decides whether to follow it, so state-level conformity varies widely. Some states conform to the federal rules and completely exempt QSBS gains, others partially conform, and some completely decouple from the provision, meaning state income tax may still apply.

Where a state does conform, the federal exclusion generally carries over to the state return. Where it does not, the full gain is taxed at state rates even when no federal tax is due. Currently, several states including California, Alabama, Mississippi and Pennsylvania, do not allow the exclusion and a few other states, such as Hawaii and Massachusetts, conform only in part. New Jersey, long among the non-conforming states, began following the federal rules for tax years beginning on or after January 1, 2026. States can also change course. For example, Oregon decoupled from the exclusion in spring 2026, and New York lawmakers advanced then withdrew a similar proposal. Because many states tie their tax codes to the federal code as of a fixed date, some may also be slow to adopt the 2025 federal changes. What matters is the state where the taxpayer lives when the stock is sold, not where the company is incorporated; a move before a sale or the location of a trust holding the shares can change the result. State treatment should therefore be reviewed with a tax advisor well before any sale.

Maximizing the benefits of QSBS goes beyond simply holding shares for five years. Advanced planning strategies such as deferrals, multiplying exclusions, increasing basis caps and charitable planning may allow qualifying founders and investors to shield even larger portions of wealth from taxes. The four strategies below address each of these in turn.

Advanced QSBS Strategies and Overview

• Section 1045 Rollovers (Deferrals):
  • A rollover works as an early-exit bridge. If a liquidity event happens before the five-year holding period is met, you can roll over the proceeds into a new qualifying QSBS within 60 days, provided you held the original stock for more than six months.
    
  • This defers the capital gains tax and preserves your original holding period clock for tax exclusion.
    
  • For stock issued after July 4, 2025, if a liquidity event occurs at year three or four, founders must weigh whether to take the new partial OBBBA exclusion or use a Section 1045 rollover to defer the entire gain and preserve a path to a 100% exclusion.
• QSBS Stacking (Multiplying Exclusions):
  • Because the gain cap applies per taxpayer, per issuer, founders can multiply the number of taxpayers, and therefore their exclusion limits, by gifting shares early to irrevocable non-grantor trusts or to family members.
    
  • Each separate non-grantor trust is treated as an independent taxpayer with its own cap, which is $15 million for stock issued after July 4, 2025. This can multiply the amount of gain eligible for the federal exclusion, although gifts are generally irrevocable, may have gift-tax consequences, and may not be recognized for state tax purposes.
    
  • Careful trust design is critical. Under IRS anti-abuse rules, multiple trusts with substantially the same grantor and beneficiaries may be treated as a single taxpayer, nullifying the extra exclusions.
• QSBS Packing (Increasing Basis Caps):
  • The gain cap is limited to the greater of the flat dollar limit or ten times the aggregate adjusted basis of the stock. For stock issued after July 4, 2025, the flat limit is $15 million.
    
  • Founders can increase their tax basis early on to maximize the 10x basis cap for hyper-growth companies. They might do so through capital contributions or by purchasing shares at fair market value before significant appreciation. However, making additional capital contributions puts more wealth at risk in a concentrated, illiquid asset, and purchasing shares at fair market value requires upfront liquidity that founders may not have.
• Charitable Remainder Unitrusts (Charitable Planning):
  • Placing QSBS into a charitable remainder unitrust, or CRUT, before a sale generally allows the trust to sell the stock without paying tax on the gain.
    
  • The proceeds remain inside the trust to pay out an income stream over time and eventually benefit charity. This approach bridges philanthropic goals with tax-free portfolio diversification within the trust. Distributions to the income beneficiary are generally taxed under the trust’s tiered rules, so the gain is typically deferred rather than eliminated, and the donor gives up the opportunity to use the Section 1202 exclusion directly.

Advanced strategies like stacking and rolling over require strict adherence to IRS timelines and corporate documentation, including attestations from the company made at the time the stock is issued. Missteps can easily trigger disqualification or unintended gift-tax consequences. The Oxford team brings deep experience working with families and business owners on their overall planning goals and objectives. In coordination with legal and tax advisors, we apply thoughtful, customized strategies to help clients pursue their financial goals.

Oxford Financial Group, Ltd. (“Oxford”) is a Registered Investment Advisor (“RIA”) with the U.S. Securities and Exchange Commission (“SEC”) and is headquartered in Carmel, Indiana. Registration with the SEC does not imply a certain level of skill or training. Additional information about Oxford, including our Form ADV and Privacy Policy, is available upon request by calling 800.722.2289 or emailing info@ofgltd.com. The content of this presentation is intended for educational and illustrative purposes only. It should not be construed as investment, tax, or legal advice, nor as a recommendation or offer to buy or sell any security or investment product. The strategies referenced above are illustrative in nature and may not be available, suitable or advisable for every individual, entity or transaction. No strategy discussed guarantees the achievement of any tax, estate planning or transaction objective. Tax and legal counsel should be engaged before taking any action. This material has been prepared using original sources believed to be reliable, but no representation is made as to its accuracy or completeness. The views expressed are those of Oxford as of the date of the presentation and are subject to change based on market, regulatory or economic conditions, which may not occur as anticipated. For full disclosures and disclaimers, please visit https://ofgltd.com/home/disclaimers. OFG-2610-53