Updated December 2025
The QSBS $10 Million Limit: What You Can Actually Exclude
Section 1202 lets you exclude up to $10 million in capital gains from QSBS—or 10 times your basis, whichever is greater. That's per company, not lifetime.
For most startup employees who paid pennies per share, $10M is the cap. For investors who wrote bigger checks, the 10x rule can matter.
The Basic Rule
Your exclusion limit is the GREATER of:
For most people, $10M is higher. The 10x rule only kicks in if you paid more than $1 million for your shares.
Example: You exercised options at $0.10/share, spending $10,000 total. Your 10x basis is $100,000—way below $10M. So your cap is $10M.
When the 10x Rule Actually Matters
The 10x rule benefits people who put significant capital into the company—usually investors, not employees.
| Your Basis | 10x Amount | Your Exclusion Cap |
|---|---|---|
| $10,000 | $100,000 | $10,000,000 |
| $100,000 | $1,000,000 | $10,000,000 |
| $1,000,000 | $10,000,000 | $10,000,000 |
| $2,000,000 | $20,000,000 | $20,000,000 |
| $5,000,000 | $50,000,000 | $50,000,000 |
The 10x rule helps angel investors and founders who invested real cash. Most employees who exercised options at low strike prices will be capped at $10M.
Per Company, Not Lifetime
This is crucial: the $10M limit applies to each company separately.
Example: You hold QSBS in Company A and Company B. Both exit. You can potentially exclude $10M from Company A AND $10M from Company B—$20M total.
Serial entrepreneurs and angel investors in multiple startups can benefit significantly from this structure.
What Happens Above the Cap
If your gain exceeds your exclusion limit, you pay normal capital gains tax on the excess.
Example: $15M gain with $10M cap
Total gain: $15,000,000
QSBS exclusion: -$10,000,000
Taxable gain: $5,000,000
Federal tax on $5M at 23.8%: ~$1,190,000
Still, saving $2.38M on the first $10M is significant. You're only paying tax on the portion above the cap.
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Enter your expected gain to see how much you can exclude and what you'll owe above the cap.
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Your Stock
Key Dates
Your holding period starts at EXERCISE, not grant. This is the #1 mistake people make.
Value
What you paid, or the value included in your income
Your Location
Your state at time of sale determines tax treatment
Strategies for Larger Gains
If you expect gains above $10M, there are legitimate strategies to optimize:
Gifting to family members
Each donee gets their own $10M limit. Gifting QSBS to children before a sale can multiply the exclusion. Gift tax rules apply—work with an estate planning attorney.
Stacking with spouse
Each spouse has a separate $10M limit. If you hold stock jointly or transfer to your spouse, you may be able to exclude up to $20M combined on the same company.
Charitable contributions
Donating appreciated QSBS to charity avoids capital gains entirely and provides a deduction. This works whether or not you've hit the $10M cap.
Timing matters: These strategies need to be executed before the sale. Transferring stock after a deal is signed may not work. Plan early.
Gift Stacking: How It Works
Each person who receives QSBS gets their own $10M exclusion. By gifting shares before a sale, you can multiply the family's total exclusion.
Example: $40M gain, family of four
Critical requirements:
- • Gifts must be completed before the sale (or binding agreement)
- • Gift tax returns required—uses lifetime exemption or triggers gift tax
- • Minors typically need a trust (UTMA or irrevocable)
- • Each recipient must meet their own 5-year holding period
- • Work with an estate planning attorney—this is complex
The Fine Print: Aggregation Rules
Related entities may be treated as one issuer for the $10M cap:
- •Parent/subsidiary relationships can aggregate
- •Members of a controlled group may share one cap
- •Stock acquired in a single transaction is aggregated
If you hold stock in multiple related entities, consult a tax advisor to understand how the caps apply.
Related Questions
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