QSBS
QSBS is stock issued by a qualifying C-corporation that, when held for 5+ years and meeting other Section 1202 requirements, can exclude the first $10 million (or 10× the holder's basis, whichever is greater) of gain from federal capital gains tax.
QSBS is the most powerful tax planning mechanism available to a US founder or early employee. To qualify, the stock must have been issued by a domestic C-corporation, the corporation must have had aggregate gross assets of $50M or less at issuance (the 'gross-asset test'), the corporation must be in a qualified trade or business (excluding services, banking, investing, restaurants, hotels), and the stock must be held for 5+ years.
The federal exclusion is up to $10M per issuer or 10× basis, whichever is greater — so a founder with $1M basis can exclude up to $10M of gain. For ultra-high-net-worth founders, the cap can be increased through 'stacking' — gifting QSBS to a non-grantor trust before the 5-year mark, which gives the trust its own separate Section 1202 exclusion. A founder with three children's non-grantor trusts can effectively stack to $40M of exclusion ($10M individual + $10M per trust × 3 trusts).
State-level conformity varies. California does not conform — California taxes the QSBS gain at full state rates. New Jersey and Pennsylvania have partial conformity. Most other states fully conform. The state-conformity status is part of the planning calculus, particularly for residents of non-conforming states considering a pre-sale relocation.