Updated December 2025

California Doesn't Care About Your QSBS Exclusion

California does not recognize the federal QSBS exclusion. If you're a California resident when you sell, you'll owe state capital gains tax on the full amount—even if you owe zero federal tax.

On a $2M gain, that's roughly $266,000 to California.

How This Works

The federal QSBS exclusion (Section 1202) lets you exclude up to $10M in capital gains from qualified small business stock.

California has explicitly chosen not to adopt this exclusion. California Revenue and Taxation Code §18152.5 does not conform to IRC §1202.

What this means in practice:

Federal tax:$0 (if you qualify for QSBS)
California tax:Up to 13.3% of your gain
Net effect:You save ~$475K federally, but still owe ~$266K to CA

This isn't a bug or oversight. California wants the revenue. They're not going to change this.

Calculate Your California Tax Bill

See exactly what you'll owe California, even with federal QSBS qualification.

QSBS Savings Calculator

Estimate your Section 1202 tax savings in 60 seconds

Your Stock

Stock Type

How Acquired

Key Dates

Your holding period starts at EXERCISE, not grant. This is the #1 mistake people make.

Grant Date

Exercise Date *

Expected Sale Date *

Value

Cost Basis *

What you paid, or the value included in your income

Expected Sale Value *

Your Location

State of Residence *

Your state at time of sale determines tax treatment

What About Moving?

Yes, people move out of California before liquidity events. It's legal. It's also complicated.

California is aggressive.

The Franchise Tax Board audits people who "move" right before a sale. If you keep your house in SF, your kids in school in Palo Alto, and your dentist in Oakland, you didn't move. You're still a CA resident.

You need to actually move.

Change your driver's license. Register to vote. Move your bank accounts. Establish real ties in the new state. The more documentation, the better.

Timing matters.

Moving 6 weeks before closing is a red flag. Moving 12+ months before is much stronger. The longer you're a resident of the new state before the sale, the harder it is for CA to challenge.

It has to make sense.

If you hate Texas and move to Austin purely for taxes, then move back to SF three months after the sale, expect an audit.

Real case: A founder moved from SF to Austin six weeks before their exit. California audited them, argued they hadn't "really" moved, and sent a bill for $180K. They're still fighting it.

Bottom line: Relocation works, but do it right and do it early. Talk to a tax attorney who specializes in California residency.

Other States That Don't Conform

California isn't alone:

State	QSBS Treatment	Top Rate
California	No conformity	13.3%
Pennsylvania	No conformity	3.07%
Mississippi	No conformity	5%
Alabama	No conformity	5%

Pennsylvania hurts less because the rate is lower. California hurts the most because the rate is high and most startup employees are there.

States With No Income Tax

If you're considering relocation, these states have no state income tax on capital gains:

Texas

Florida

Washington

Nevada

Wyoming

South Dakota

Alaska

Tennessee

New Hampshire has no tax on earned income but limited taxes on interest/dividends. Most people who relocate for QSBS reasons go to Texas, Florida, or Washington.