Section 1202 — Qualified Small Business Stock
Most startups fail.
QSBS rewards the ones that don't.
Section 1202 creates an incentive for the founders who build companies, the employees who join early, and the investors who back them at the riskiest stage. 75% of claimants use it exactly once. One bet. One reward.
The data tells a different story than the one you've been hearing.
- Claimed in only one year
- 75%
- Median annual exclusion
- $2,810
- Claimants earning under $1M
- 74%
Treasury data, 2012–2022. Income excludes QSBS gains. Sources & methodology →
The Incentives Are Working
Nobody starts a company because of a tax incentive. But QSBS reduces the penalty for taking the risk — and the data shows that matters. When the exclusion was expanded to 100% in 2010, startup investment increased, more companies were created, and more people were employed at startups.
~12%
Investment in startup firms increased by approximately 12% after the 100% exclusion
Method: Within-firm variation comparing funding rounds before/after SBJA 2010
Chen & Farre-Mensa (2023/2025) ↗
QSBS-eligible industries experienced more firm births, more startup employment, and increased first-round VC
Method: Diff-in-diff comparing eligible vs ineligible industries after 2010 increase to 100%
Who Actually Uses It
These are the people who took the risk. Founders who spent years building something. Employees who took below-market salary for equity. Investors who wrote checks when nobody else would.
75%
used it exactly once in 11 years
One exit. One reward. Only 6% claimed it five or more years.
$67,820
75th percentile annual exclusion
The typical meaningful QSBS exit. Median is just $2,810, pulled down by micro-claims.
2.55%
of all capital gains in 2021
QSBS is a rounding error in total capital gains.
Who QSBS actually helps
Senior Engineer
An engineer sells qualifying shares held for six years, realizing $40K of gain after basis.
First-time Founder
A founder sells qualifying shares held for eight years, realizing $2M of gain after basis.
Early Employee
An early employee sells qualifying shares held for six years after exercise, realizing $150K of gain.
Seed Investor
An investor sells qualifying shares for $200K after seven years, with $25K of basis and $175K of gain.
Hypothetical comparison at a flat 13.3% rate, assuming qualifying stock acquired September 28, 2010 through July 4, 2025 and unused exclusion capacity. California does not allow the QSBS exclusion; its modeled tax is the “without exclusion” amount. Actual tax depends on income and other rules — try the calculator.
How large is a typical QSBS exclusion?
Annual exclusion amount by percentile. 90% of claimants exclude less than $591K.
Source: Treasury OTA WP-127, Table 1. Percentiles of annual individual QSBS exclusion claims, 2012-2022.
Distribution data: U.S. Treasury OTA Working Paper 127, January 2025. Archetype examples are illustrative, based on typical QSBS claim profiles.
The "94% Goes to Millionaires" Claim
You've probably heard that 94% of QSBS benefits go to millionaires. The Treasury data shows why that's misleading.
Who claims QSBS?
By number of unique claimants (average income excluding QSBS gains)
Income measured as average Total Positive Income (TPI), excluding QSBS gains. Source: Treasury OTA WP-127, Figure 4.
Count the people, not just the dollars:
74%
of QSBS claimants earn under $1 million
(by average income, excluding QSBS gains)
The single largest group (35%) earns $100K-$400K. These are founders and early employees, not millionaires.
How ITEP gets to 94%
ITEP claims: "94% of QSBS exclusions were claimed by people with more than $1 million of annual income."
That's a dollar-weighted stat, not a count of people. Here's how they construct it:
74% of dollars go to people who already earned over $1M before counting QSBS gains
20% of dollars go to people earning under $1M normally, whose one-time startup exit temporarily pushed them over
ITEP lumps both groups to claim 94% "goes to millionaires."
These two groups are the incentive working as designed.
The 74% are investors who funded early-stage companies. The 20% are founders and employees who built them. QSBS connects capital to builders. Both sides show up in the "94%" because both sides took the risk the policy was designed to reward.
Source: U.S. Treasury OTA Working Paper 127, January 2025
How Treasury actually measures income (and why it matters)
Treasury's Working Paper 127 classifies QSBS claimants using Total Positive Income (TPI), the sum of positive income sources on a tax return. Critically, QSBS gains that are excluded from income are also excluded from TPI. This is a deliberate methodological choice: Treasury measures a claimant's regular economic income, not a one-time liquidity event.
Treasury also uses a 3-year average TPI (the current year plus the prior two years) to classify claimants, smoothing out year-to-year volatility. For unique claimant counts, they average TPI over the full 11-year sample period (2012–2022). This methodology is designed to capture a person's typical income level.
Example: A founder earning $150K/year sells their company after 8 years for $2M. By Treasury's methodology (which excludes QSBS gains from income), they're classified in the $100K-$400K income bracket. Not a millionaire. ITEP adds the gain back to reach "94%," reclassifying this person as a millionaire based on a single liquidity event.
ITEP's approach (adding the excluded QSBS gain back into income) directly undoes Treasury's deliberate choice. The result: people with normal incomes who had one successful exit get lumped in with actual high-income earners, inflating the "millionaire" count.
Methodology: Treasury OTA WP-127, Section III ("Data and Sample Construction")
Exit Tax Calculator
Compare illustrative state taxes on qualified stock-sale gain using simplified rates and exclusion assumptions.
Federal rules as of July 4, 2025
OBBBA changed the clock and the cap — not the rest of §1202
Stock acquired on or before July 4, 2025 must be held for more than five years. Later acquisitions use at least three, four, or five years for 50%, 75%, or 100% exclusion. The eligible-gain limit generally uses remaining dollar capacity ($10M for older stock, $15M for newer stock) or ten times qualifying basis, whichever is greater. The $75M gross-asset threshold applies to stock issued after July 4, 2025; earlier issuances use $50M. The new dollar amounts are indexed after 2026. Read the rules and effective dates.
What did not change: C-corporation, original issuance, the active-business test, and the excluded industries. QSBS is still a Clinton (1993) / Obama (2010) / Trump (2025) statute — not a one-president giveaway.
JCT scores the expansion as a small near-term revenue gain through 2028, then −$17.2B over 2025–34 (JCX-35-25). That is a stock-and-flow number, not a $42 billion annual giveaway.
Sale proceeds minus tax basis.
2027+ applies the modeled RI change; future inflation and other law changes are not projected.
Assumes unused dollar-limit capacity and all eligibility requirements met. Uses simplified rates; federal tax, local tax, and the 10× basis alternative are not calculated.
Hypothetical holding-period comparison: stock newly acquired after July 4, 2025 cannot reach three years until 2028, four until 2029, or five until 2030. The tax-year selector applies modeled state rules; it does not validate acquisition and sale dates. Special carryover rules need separate review.
Modeled state tax on this gain in Alabama
$141
Never conformed
Compare key states on the same gain
| State | Model Rate | QSBS Status | Modeled Tax |
|---|---|---|---|
| Texas | 0% | No income tax | $0 |
| Florida | 0% | No income tax | $0 |
| Washington | 7% | conforms | $0 |
| California | 13.3% | decoupled | $374 |
| Oregon | 9.9% | decoupled | $278 |
| New York | 10.9% | conforms | $0 |
The Self-Defeating Policy
California never conformed and still hosts the largest U.S. venture cluster — that cluster is path-dependent. For other states, the margin that matters is whether founders who can leave, do. New York kept QSBS in 2026 after a public fight. Oregon's governor flagged competitiveness the day she signed decoupling.
State QSBS Conformity
Choose a state to see its tax rate and policy details. Statuses include enacted changes; check the notes for effective dates.
The Migration Problem
Bar colors show QSBS status in the state policy dataset, not migration direction. Migration figures are from 2021–2022; policy statuses include subsequent changes.
Top 5 States Gaining Filers
Net interstate tax filer migration · IRS SOI 2021–2022
View numbers and state statuses
| State / status | Net filers |
|---|---|
| Florida— No income tax | +125,551 |
| Texas— No income tax | +88,216 |
| North Carolina✓ Conforms | +43,653 |
| South Carolina✓ Conforms | +32,927 |
| Tennessee— No income tax | +30,935 |
Top 5 States Losing Filers
Net interstate tax filer migration · IRS SOI 2021–2022
View numbers and state statuses
| State / status | Net filers |
|---|---|
| California× Decoupled | -144,203 |
| New York✓ Conforms | -108,586 |
| Illinois× Decoupled | -45,460 |
| Massachusetts◐ Partial | -26,033 |
| New Jersey✓ Conforms | -20,820 |
$102 billion
in AGI lost by California to outbound migration, 2020-2022
In 2022 alone, 24,670 high-earner households left, taking $16.1 billion in AGI.
Migration is driven by housing costs, remote work, and overall tax burden — not QSBS alone. California's cluster is the exception that opponents cite, and they are right that it never needed QSBS to dominate venture. The 2026 lesson is New York: a high-tax state that kept the exclusion after founders showed up, rather than California 2013.
Sources: CA Legislative Analyst's Office (2024), Center for Jobs (2024)
Migration data: IRS SOI Migration Data 2021-2022, Tax Foundation analysis Dec 2024
The Campaign
ITEP's memo still travels. After 18 months the outcomes do not: New York, Washington, and Maryland killed decoupling. Oregon, Maine, Illinois, Vermont, and Rhode Island passed it. This is a contested fight, not an unstoppable wave.
Same ITEP memo. Different outcomes.
2025–2026 Campaign Timeline
Jan 2025
Oregon SB 1507 and Washington SB 6229 introduced
Same ITEP analysis, same session. OCPP testimony behind the Oregon bill.
Feb 2025
New York includes decoupling in the budget proposal
Would have been retroactive to Jan 1, 2025.
Dec 2025
DC decouples via B26-0457 / Act 26-214
Income and Franchise Tax Conformity Act. (B25-0900 is a 2024 CBE emergency act and does not address §1202.)
2026
Washington SB 6229 and HB 2292 fail
No floor vote. Washington's 7% capital-gains excise tax still excludes QSBS.
Apr 9, 2026
Governor Kotek signs Oregon SB 1507
Full §1202 add-back for 2026+. Signing letter flags competitiveness and pledges 2027 QSBS-specific legislation.
Apr 10, 2026
Maine LD 2212 signed
Expansion-only: add-back for stock acquired after July 3, 2025. Pre-OBBBA stock still conforms.
Apr 2026
Maryland HB 801 dies
Session adjourned April 13. Maryland still conforms.
May 28, 2026
New York FY2027 budget signed — QSBS decoupling dropped
The exclusion is preserved. A high-tax state kept QSBS after founder pushback.
Jun 4, 2026
Oregon referendum fails to qualify
SB 1507 stays in force. The live fight moves to Kotek's 2027 pledge.
Jun 16, 2026
Illinois SB 3019 signed
Full add-back for tax years ending on/after Dec 31, 2026.
Jun 2026
Vermont Act 164 and Rhode Island HB 7127
Vermont adds back federal QSBS for 2026+ (40% CG exclusion still generally available). Rhode Island locks a 2027 add-back — 2026 sales still conform.
Same playbook. Mixed results. The next session is already scheduled.
Who's behind it
- ITEP (Institute on Taxation and Economic Policy) produces the "94%" stat and provides model legislation
- Working Families Party runs state-level political campaigns
- OCPP (Oregon Center for Public Policy) supplied the analysis behind Oregon's SB 1507
The messaging
"Trump tax giveaway"
QSBS was signed by President Clinton in 1993, expanded to 100% exclusion by President Obama in 2010. Bipartisan policy, partisan framing.
Bundled revenue estimates
Revenue projections lump QSBS decoupling with unrelated tax changes, inflating the headline number.
Why Blanket Decoupling Is the Wrong Answer
If there are concerns about how QSBS is used at the top end, the response should be proportional. Not a blunt instrument that hits everyone.
What decoupling actually does
- × Taxes the engineer realizing $40K of qualifying stock-sale gain the same way it taxes a $50M exit
- × Punishes the 74% of claimants earning under $1M to address concerns about the top end
- × Drives founders and capital to conforming states, losing both the people and the revenue
- × Ignores one-time use: 75% of claimants use QSBS exactly once. This isn't a recurring loophole
What the data actually supports
- ✓ QSBS increases startup investment by ~12% (Edwards & Todenhaupt)
- ✓ QSBS drives more firm births and startup employment (Chen & Farre-Mensa)
- ✓ Median exclusion is $2,810 — less than most people's tax refund
- ✓ Decoupled states lose filers — high earners move to states that conform
What the Treasury data actually shows about abuse
$6.65 billion
in QSBS exclusions claimed through trusts in 2021 — 13% of that year's total, up from nearly nothing in 2012.
Trust claims have grown significantly, from negligible in 2012 to $6.65B in 2021. Related nongrantor trusts can each take a separate per-issuer cap. That stacking is the real top-end problem. It is not the median $2,810 claim.
Source: U.S. Treasury OTA Working Paper 127, 2021 trust/estate claims.
Reform the stacking. Do not repeal the median claim.
Trust stacking is the problem the Treasury data actually shows. Cap or disallow multiplied exclusions through related nongrantor trusts. Do not tax the median $2,810 claim to do it.
A targeted fix: a per-taxpayer lifetime cap that does not multiply across related nongrantor trusts, or an income phaseout that leaves the 74% of claimants under $1M untouched. Build Back Better floated a 50% exclusion for trusts — prior art, not an endorsement.
Blanket state decoupling taxes the engineer realizing $40K of qualifying stock-sale gain the same way it taxes a stacked $50M exit. New York rejected that trade in 2026. Oregon's governor asked for a 2027 bill the day she signed it.
What You Can Do
Data without distribution is just noise. Get this in front of decision-makers.
Contact your state legislator
Most legislators voting on QSBS decoupling haven't seen the Treasury data. Send it to them.
Find your legislatorShare this data
Pre-written message with the key facts. Copy and post.
The live fight is Oregon 2027
Governor Kotek pledged QSBS-specific legislation the day she signed SB 1507. New York is the case study that showing up works.
Oregon 2026 legislationSources
U.S. Treasury OTA Working Paper 127 ↗
January 2025. Primary source for all distribution, claimant, and exclusion data (2012-2022).
Study finding ~12% increase in startup investment after 100% QSBS exclusion. Uses within-firm funding round variation.
Chen & Farre-Mensa (2023/2025) ↗
Diff-in-diff study finding more firm births, startup employment, and first-round VC in QSBS-eligible industries.
IRS SOI Migration Data, 2021-2022 ↗
Interstate migration of tax filers and AGI. See also: Tax Foundation analysis (Dec 2024) ↗
California Legislative Analyst's Office (2024) ↗
Analysis of high-earner outmigration and AGI losses from California, 2020-2022.
Source of the "94% goes to millionaires" claim. State-by-state revenue estimates.
State legislation
Oregon DOR 2026 summary ↗ · OR SB 1507 ↗ · DC B26-0457 ↗ · WA SB 6229 ↗ · MD HB 801 ↗
Start with the practical questions
What does QSBS mean for your stock?
Read the basics, understand the requirements, and explore how state rules affect a sale. Each guide links to primary sources.
Start with the basics
Understand the benefit, the requirements, and the dates that matter.
Questions about your stock
Explore rule changes, employee equity, and more involved planning questions.
Understand your state
Federal qualification is only part of the picture. State treatment and residency matter too.
Explore In Depth
Each topic has its own dedicated page with full data, sources, and analysis.
The "94%" Claim
Why the headline stat about millionaires is misleading — and what the Treasury data actually shows.
Exit Tax Calculator
Calculate the state tax impact on your startup exit. Compare all 50 states side by side.
Who Uses QSBS
75% claim it once. Median exclusion: $2,810. The real people behind the numbers.
The Evidence
Peer-reviewed research showing QSBS drives startup investment, firm creation, and employment.
State Impact & Migration
How decoupling drives founders and capital to other states — IRS migration data tells the story.
Sources & Data
Every claim sourced. Treasury data, academic papers, IRS migration statistics, and methodology.