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For startup employees and entrepreneurs, here’s what you need to know:

Many startup employees pay as much as 23.8% federal tax on long‑term equity gains (20% long‑term capital gains + 3.8% NIIT) when careful QSBS planning could reduce that significantly.¹ ²

The Opportunity: Qualified Small Business Stock (QSBS) allows you to exclude up to $10 million of gain (or 10x your cost basis if higher) from federal taxation when you sell qualified shares you've held for at least five years. And for shares you acquire now, the exclusion amount has recently been increased to $15 million.¹ ³

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Key Insight: Rules differ by issuance date.

• Issued on or before July 4, 2025: Dollar cap is $10M (or 10× basis). 100% exclusion requires >5 years holding (if issued after 9/27/2010).
  
• Issued after July 4, 2025: Dollar cap is $15M (indexed starting 2027) or 10× basis, and a tiered holding schedule applies:
  
  • 3 years = 50% exclusion
  • 4 years = 75% exclusion
  • 5+ years = 100% exclusion
• Gross-assets ceiling at issuance: ≤ $50M for older stock; ≤ $75M for post–July 4, 2025 stock.³ ⁸

Action Items:

• Verify company eligibility.
• Plan holding periods (use new tiers for post–July 4, 2025 issuances).
• Understand state tax variations.
• Coordinate spousal/trust ownership where appropriate
• Document everything—including potential §1045 rollover paths if you must sell early.¹ ³ ⁷ ⁹

Timeline: QSBS planning starts before stock acquisition and requires careful timing of exercises, 83(b) elections, lot tracking, and sales.

Family Bonus: Because the cap is per taxpayer, couples can potentially double benefits only if each spouse is a separate taxpayer owner (e.g., via pre‑sale gifts/ownership), not merely by filing jointly.³ ⁶

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Your Startup Equity Could be Worth Far Less After Taxes Than You Think

Imagine selling your startup equity and paying little to no federal capital gains tax on qualifying shares. This isn’t a fantasy; it’s a legitimate tax framework called Qualified Small Business Stock (QSBS) under Section 1202 of the Internal Revenue Code. Yet despite its significant opportunity, many startup employees remain unaware of this powerful tool or the 2025 updates that change the analysis for newly issued stock.

The numbers are meaningful: depending on issuance date, QSBS can provide up to $10 million (older issuances) or $15 million (post‑July 4, 2025 issuances) of federal tax‑free gains per taxpayer, per issuer—or 10× basis, whichever is greater—subject to meeting the other requirements.¹ ³ For someone otherwise in the top long‑term capital gains bracket, that can represent millions in federal tax avoided.

Here’s what most people miss: QSBS isn’t just about federal savings. It’s about turning what would normally be a massive tax event into potentially zero federal tax on qualifying amounts. State rules vary, so plan both layers.

The stakes are high, and the rules are specific. Let’s break down what to know and what changed in 2025.

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6 Annual Tax Savings Strategies Many Startup Employees Never Discover 

Strategy #1: Verify Company Eligibility Before You Invest

Not all startup stock qualifies for QSBS treatment, and the rules are more restrictive than many people realize.

Your company must meet strict requirements both when you acquire the stock and throughout substantially all of your holding period. A single misstep can disqualify the entire investment from QSBS treatment.¹ ³ ⁷

Critical Qualification Requirements

• Gross assets test: At and immediately after issuance, the company must have ≤ $50M in gross assets for older issuances or ≤ $75M for stock issued after July 4, 2025.³ ⁸
  
• Active business requirement: During substantially all of your holding period, ≥80% of company assets must be used in a qualified active business. Certain industries are excluded.³
  
• Original issuance: You must acquire stock directly from the company (including for services). Secondary purchases generally do not qualify.¹ ⁵
  
• C‑Corporation status: The company must be a domestic C‑corporation (not LLC/partnership/S‑Corp). An LLC that converts to a C‑Corp before issuance can have new stock that qualifies.³
  
• Redemptions risk: Issuer buybacks within certain look‑back/look‑forward windows can taint QSBS eligibility for stock issued around that time. Review Treas. Reg. §1.1202‑2 before approving or selling into repurchases or company tenders.⁷
  
  

Advanced Technique: Request annual QSBS qualification letters from your company’s legal counsel, maintain cap‑table snapshots, and archive asset‑test support.
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Strategy #2: Master the Holding Period Game

• Stock issued on or before July 4, 2025: Requires >5 years holding for 100% exclusion (if issued after 9/27/2010). The clock starts when you own shares—not at option grant.¹ ³
  
• Stock issued after July 4, 2025: Tiered schedule applies—3 years = 50% exclusion; 4 years = 75%; 5+ years = 100%. Match your expected liquidity horizon to these tiers.³ ⁴ ⁸
  
  

Implementation Framework

• Option exercise timing: Buying your stock options (also called “exercising”) earlier starts the QSBS clock for favorable tax treatment sooner, but ISOs (incentive stock options) can trigger the AMT (alternative minimum tax, a parallel tax system that can add tax in the year you exercise). Run an AMT projection before exercising.²
  
• Early exercise/RSAs + 83(b): If available, early exercise or RSAs with a timely 83(b) election can start the clock sooner. RSUs typically do not qualify as original issuance until delivered and may fail other tests so have counsel review.
  
• Lot tracking: Maintain detailed records for each acquisition and its 3/4/5+ (or 5‑year) milestones.
  
  

Critical Considerations

• Company risk & cash needs: Earlier exercises tie up cash and increase concentration risk.
  
• AMT exposure: Early ISO exercises can create AMT liability in the exercise year; plan liquidity.
  
  

Illustrative example (plain English): If you live in California and sell $10M of QSBS, you’ll still owe California state income tax (California doesn’t follow the federal QSBS rule), even if your federal tax on those shares is $0. If you legally move and become a Texas resident before the sale, you could avoid paying California state tax on that sale.

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Strategy #5: Coordinate QSBS with Estate Planning Strategies

The Potential Wealth Transfer Multiplier: Each person (and certain trusts) can have their own QSBS limit. By sharing or moving shares to family members or trusts the right way, you can multiply how much gain is excluded. Documentation and good structure matter.

Advanced Transfer Techniques: 

• Charitable gifts: Donate some QSBS to a qualified charity. Get a valuation first and confirm the shares qualify.
  
• Gifts to family: Use the annual gift limit (for example, $18,000 per person in 2024) to move shares so future growth happens in their name.
  
• Grantor / IDGT trusts: A grantor trust means you still pay the trust’s income taxes. An IDGT (an “intentionally defective grantor trust”) is designed so you keep paying the tax while the growth goes to your heirs, often helpful for QSBS when set up correctly.
  
• Multi‑generation plans: Put the paperwork in place so benefits can help kids and grandkids.
  
  

Timing Considerations

• Pre-appreciation transfers: Transferring earlier lets more of the later growth qualify under someone else’s cap.
  
• Valuation timing: Use an independent appraisal to set the gift’s value.
  
• Holding qualification: Anyone who receives shares must meet the required holding period (3, 4, or 5+ years for new stock; generally 5 years for older stock) before selling to claim QSBS.
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Strategy #6: Plan for Partial Sales and Liquidity Events

Many startup employees need to cash out some shares before the company fully exits, but selling early requires careful QSBS planning. For example:

Partial Sale Strategies

• Secondary purchases (fact‑check, plain English): Buying someone else’s shares usually does not qualify for QSBS, because §1202 requires you to receive stock directly from the company at original issuance. Gifts/inheritance can carry over QSBS status, but purchases from another holder do not. ¹ ⁵
  
• Company buybacks/tenders (redemptions rule): Company repurchases near your issuance can disqualify nearby issuances under Treas. Reg. §1.1202‑2. Always check timing and size with counsel. ⁷
  
• Picking which shares you sell (lot control): Tell your broker exactly which lots you’re selling to identify qualified shares. If you don’t, the IRS defaults to FIFO (first‑in, first‑out)—which might select shares that don’t qualify yet. ²
  
  

Advanced Liquidity Techniques

• Borrowing against shares: Use a non‑recourse loan (you pledge your QSBS shares as collateral; if you don’t repay, the lender can take only those shares and not other assets) to get cash without selling and triggering taxes. This adds interest cost and lender rules, so compare carefully.
  
• Charitable remainder trusts (CRTs): Contribute QSBS to a trust that lets you receive steady income now, avoid immediate capital gains taxes, and direct the remainder to charity later.
  
• Installment sales: Spread out the sale of QSBS over several years so the tax hit is smaller in any single year.
  
• §1045 rollover: After ≥6 months holding, roll gains into new QSBS within 60 days to preserve benefits if you must sell early.¹⁰
  
  

Illustrative example: An early employee has 100,000 shares acquired in three tranches: 40,000 in 2020, 30,000 in 2021, and 30,000 in 2022. In a 2026 tender, they sell 50,000 shares. The first 40,000 (2020 lot) qualify under old‑rule timing; 10,000 from 2021 may qualify depending on dates; later lots may not yet qualify, so lot selection and timing matter.

Implementation Roadmap

Phase 1: Assessment and Documentation

Immediate Actions

• Request QSBS qualification confirmation from company counsel.
  
• Document all acquisition/exercise dates with support.
  
• Calculate projected tax savings under current ownership.
  
• Review state‑tax implications for current and future residency.
  
  

Foundation Building

• Establish systematic record‑keeping for all equity transactions.
  
• Create calendar reminders for 3/4/5+ (or 5‑year) milestones.
  
• Consult tax professionals experienced with QSBS.
  
• Review estate planning in light of QSBS benefits.
  
  

Phase 2: Strategic Implementation

Optimization Activities

• Consider early exercise (and 83(b) for RSAs) to start holding periods—model AMT and risk.
  
• Evaluate gifting/trust strategies where appropriate.
  
• Plan state residency changes if beneficial and feasible.
  
• Coordinate QSBS with your broader tax, liquidity, and estate strategies.
  
  

Advanced Positioning

• Implement trust strategies for additional exclusion capacity where suitable.
  
• Coordinate sales timing with spouse if married (and if each is a separate taxpayer owner).
  
• Consider charitable strategies that preserve QSBS benefits.
  
• Build relationships with counsel and advisors who live this topic.
  
  

Common Mistakes That Cost Millions

• Not Verifying Company Qualification: Structure changes, assets, or activities can quietly disqualify stock.
  
• Delaying Option Exercises: Waiting until liquidity to exercise often means missing the applicable holding‑period requirement entirely.
  
• Ignoring State Tax Planning: Overlooking state non‑conformity (e.g., CA, NY), opportunities (e.g., NJ 2026 conformity), or benefits of no‑tax states.
  
• Poor Record Keeping: Weak records on issuance, dates, basis, asset tests, and redemptions can jeopardize claims.
  

Missing Family/Trust Planning: Skipping gifts/trusts that could multiply exclusions with substance before major appreciation events.

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Your Next Steps

QSBS is a powerful framework, but it requires proactive planning and careful execution. The difference between proper planning and accidental disqualification can be measured in millions.

Immediate Next Steps

• Company Verification: Get written confirmation of QSBS qualification status from counsel.
  
• Holding‑Period Analysis: Calculate your 3/4/5+ (or 5‑year) qualification dates for all holdings.
  
• State‑Tax Assessment: Model federal + state outcomes (note NJ 2026 conformity) and explore planning.
  
• Professional Consultation: Work with Evergreen Wealth and your tax/legal advisors to implement strategies aligned with your broader financial goals.
  
  

Ready to Maximize Your QSBS Benefits?

At Evergreen Wealth, our team integrates tax and investment strategies to help you keep more of what you’ve built.

Schedule a complimentary consultation with a financial advisor. We’ll review your holdings, assess optimization opportunities, and create a personalized action plan.

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Frequently Asked Questions About QSBS Tax Strategy

How much can QSBS save on startup equity taxes?

QSBS can eliminate up to 100% of federal tax on qualifying gains subject to caps, but it is not an annual allowance. The exclusion is the greater of the dollar cap ($10M for older issuances; $15M for post‑July 4, 2025 issuances, indexed from 2027) or 10× basis, per taxpayer, per issuer. Actual savings depend on your facts and state law.¹ ³ ⁴ ⁸

What are the QSBS qualification requirements for Section 1202?

Entity must be a domestic C‑corporation; you must acquire original‑issuance stock; the company must meet the gross‑assets test at and immediately after issuance (≤ $50M older; ≤ $75M new) and maintain ≥80% active‑business use of assets during substantially all of your holding period; and you must meet the applicable holding‑period rule. Redemptions around issuance can taint eligibility.¹ ³ ⁷ ⁸

Can startup employees claim QSBS on secondary stock purchases?

Usually, no. To get QSBS, you must receive the shares directly from the company when they are first issued to you (original issuance). Buying shares from another person later is a secondary purchase and doesn’t qualify. Gifts or inheritance can carry over QSBS status, but purchases from another holder do not.¹ ⁵

How do QSBS and ISOs/AMT interact?

Exercising ISOs (incentive stock options) early can start the QSBS clock sooner. But it can also trigger the AMT (alternative minimum tax, a parallel tax that can add tax in the year you exercise). Do a quick AMT check before you exercise.²

What documentation proves QSBS qualification?

Keep simple proof that your shares qualify: (1) records showing the shares came directly from the company (original issuance), such as stock certificates or digital statements (a QSBS note/legend helps); (2) dates and prices when you exercised or bought; (3) cap‑table snapshots and support that the company met the 80% active‑business test for almost all of your holding period; and (4) records showing there were no disqualifying company buybacks near your issuance.

Can retirement accounts hold QSBS and still get §1202 benefits?

You can hold QSBS in an IRA, but the §1202 exclusion generally doesn’t help because IRA withdrawals are taxed as ordinary income. QSBS works best in a regular taxable account.

How does the 10× basis rule work?

“Basis” means your starting amount invested in the shares (what you paid, plus certain costs). The 10× basis rule lets you exclude up to 10 times that amount from federal tax. If this number is bigger than the dollar cap ($10M or $15M, depending on issuance date), you can use it instead. It applies to the shares you sell that year, so keep good lot records and plan timing.¹ ³

How does state residency affect QSBS benefits?

States have their own rules. Some follow the federal QSBS exclusion; others like, California and New York, do not, so they still tax the gain. New Jersey will follow the federal rule for tax years beginning 1/1/2026. Where you live when you sell often controls your state tax, so timing a move can matter.⁹

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Sources 

1. Internal Revenue Code Section 1202 — Cornell Law School. https://www.law.cornell.edu/uscode/text/26/1202
   
2. IRS Publication 550 — Investment Income and Expenses. https://www.irs.gov/publications/p550
   
3. Perkins Coie (July 10, 2025), “Significant Changes by the One Big Beautiful Bill Act to the Qualified Small Business Stock Provisions of Section 1202.” https://perkinscoie.com/insights/update/significant-changes-one-big-beautiful-bill-act-qualified-small-business-stock
   
4. Greenberg Traurig (July 2025), “Qualified Small Business Stock (QSBS) Regime Expanded Under ‘One Big Beautiful Bill Act’.” https://www.gtlaw.com/en/insights/2025/7/qualified-small-business-stock-qsbs-regime-expanded-under-one-big-beautiful-bill-act
   
5. The Tax Adviser (AICPA), “Qualified Small Business Stock: Considerations for 100% Gain Exclusion.” https://www.thetaxadviser.com/issues/2016/mar/qsbs-considerations-for-100-percent-gain-exclusion/
   
6. Frost Brown Todd, “A Section 1202 Walkthrough: The Qualified Small Business Stock Gain Exclusion.” (Updated July 22, 2025). https://frostbrowntodd.com/a-section-1202-walkthrough-the-qualified-small-business-stock-gain-exclusion/
   
7. Treasury Regulation §1.1202‑2 — Qualified small business stock; effect of redemptions (e‑CFR/Cornell LII). https://www.law.cornell.edu/cfr/text/26/1.1202-2
   
8. Grant Thornton (2025), “Explaining Enhanced Section 1202 Benefits.” https://www.grantthornton.com/insights/alerts/tax/2025/insights/explaining-enhanced-section-1202-benefits
   
9. Mintz (July 14, 2025), “New Jersey Adopts QSBS Exclusion (Conforms in 2026).” https://www.mintz.com/insights-center/viewpoints/2906/2025-07-14-new-jersey-adopts-qsbs-exclusion-game-changer-state
   
10. RSM, “Understanding the Qualified Small Business Stock Tax‑Free Rollover (Section 1045).” https://rsmus.com/insights/services/business-tax/understanding-the-qualified-small-business-stock-tax-free-rollov.html