Selling Startup Shares? How OBBBA Changes QSBS, and Why California Still Taxes the Gain

Short answer

OBBBA made qualified small business stock (QSBS) more generous for founders, early employees and angel investors who acquire stock after July 4, 2025. You can now exclude part of the gain after only 3 years, and the cap and company size limits are higher. For Californians, though, the state still taxes the full gain, so plan for the state bill.

Key facts and figures

• For QSBS acquired after July 4, 2025: 50% exclusion at 3 years, 75% at 4, 100% at 5 or more (§70431, verified Oct 15, 2026).
• Per-issuer cap rises to $15,000,000 (or 10 times basis, if greater), indexed after 2026 (§70431; §1202(b), verified Oct 15, 2026).
• The gross asset test rises to $75,000,000 for stock issued after enactment (§70431(c)).
• The part of the gain that is not excluded is taxed at up to 28%, not the usual 20% long-term capital gain rate (§1(h)(4), (7), verified Oct 15, 2026).
• California does not conform to §1202 (R&TC §18152): the gain is generally fully taxable for state purposes, at a top rate of 13.3% (R&TC §18152; FTB Schedule D (540) instructions, verified Oct 15, 2026).

The new federal tiers

Sources: Pub. L. 119-21 §70431; 26 U.S.C. §1202; Gibson Dunn, verified Oct 15, 2026. The "applicable date" is the date of enactment, July 4, 2025 (FTB summary). The $15,000,000 cap is indexed for taxable years beginning after 2026, and halved for married filing separately.

Core requirements still apply

• Domestic C corporation when the stock is issued and during substantially all of your holding period (§1202).
• Original issuance: acquired from the company for money, property (not stock) or services, not bought from another shareholder.
• Gross assets: aggregate gross assets (cash plus the adjusted basis of other property, with contributed property at fair market value) must not have exceeded $75,000,000 at any time on or after August 10, 1993 and before issuance, and must not exceed it immediately after issuance, including the money received. The $75,000,000 limit applies to stock issued after July 4, 2025 ($50,000,000 before). The amount is indexed for taxable years beginning after 2026 (§1202(d)(1) to (2); §70431(c), verified Oct 15, 2026).
• Active business: at least 80% of assets by value used in a qualified trade or business. Excluded fields include health, law, engineering, architecture, accounting, consulting, financial services and brokerage, among others (§1202(e), verified Oct 15, 2026).

Converting an LLC to a C corporation can start a new QSBS clock; our entity structure guide explains the trade-offs.

Illustrative example (illustrative numbers)

A San Jose founder acquires stock at original issue in August 2025 with a $100,000 basis, and later sells it for a $5,000,000 gain. Assume the company qualifies throughout. The cap is the greater of $15,000,000 or 10 x $100,000, so $15,000,000. The table assumes the top federal bracket, that the 3.8% net investment income tax (NIIT) applies, and no losses or carryovers.

The 28% is taxed on the taxable portion only, and the figures are illustrative. California in every case: the full $5,000,000 is generally taxable (FTB).

The part of the gain that is not excluded (50% at the 3-year tier, 25% at the 4-year tier) is taxed at up to 28%, not the usual 20% long-term capital gain rate, and may also be subject to the 3.8% net investment income tax. The excluded part is not subject to NIIT, and for stock acquired after July 4, 2025 it is not an AMT preference item (§1(h)(4), (7); §57(a)(7); Gibson Dunn, verified Oct 15, 2026). The 28% is a ceiling: the 28% rate gain is netted against collectibles loss, net short-term capital loss and long-term capital loss carryovers (§1(h)(4)(B)). Gain above the per-issuer cap is, on a plain reading, not section 1202 gain, so it is taxed at the ordinary long-term rate of up to 20%. A CPA should review this reading and the netting for your facts.

California planning

California does not conform. R&TC §18152 says §1202 does not apply, and the FTB instructions tell filers to enter the entire gain on Schedule D (540) (R&TC §18152; Schedule D (540) instructions; FTB Pub. 1001). SB 711 moved California's conformity date to January 1, 2025, which does not change this: §18152 is a standing exception, and the date predates OBBBA (FTB conformity). The top California rate is 13.3% (12.3% plus the 1% mental health services tax on taxable income over $1,000,000), so in the $5,000,000 example California tax could reach about $665,000 at the top rate, whatever the holding period. A California resident's state tax on a large QSBS sale can therefore be significant. Residency at the time of sale matters, and moving shortly before a sale draws FTB scrutiny; see our high-net-worth checklist. For a full list of federal and California differences, see OBBBA 2026: federal vs California. If the shares are part of a family gifting plan, see 2026 family gifts.

Cross-border founders

If you hold QSBS through a foreign entity or plan to move abroad, the exclusion depends on who holds the stock and when. Founders with Chinese or Hong Kong holding companies should also review NCTI rules and our pre-immigration planning guide.

Frequently asked questions

Talk it through

If you are issuing, receiving or selling startup stock, you are welcome to book a consultation. Our tax planning services include QSBS eligibility reviews and California planning.

Primary sources

• Pub. L. 119-21 §70431
• 26 U.S.C. §1202
• FTB federal tax changes (OBBBA)

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