California QSBS Exclusion Calculator (2026): §1202 Eligibility and Worked Examples

The California QSBS exclusion does not exist: California does not conform to IRC §1202, so 100% of your gain is taxed at CA ordinary rates (up to 13.3%) even when the full amount is federally excluded.

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What QSBS does at the federal level

Section 1202 of the Internal Revenue Code lets eligible founders, employees, and investors exclude up to $10 million (or 10× basis, whichever is greater) of capital gain from federal tax when they sell qualified small business stock held for at least five years (26 U.S.C. § 1202).

For QSBS issued after September 27, 2010, the exclusion is 100% federal. That turns what would be a 23.8% federal tax bill (long-term capital gains + net investment income tax) into zero — on the first $10M of gain. It is one of the most generous breaks in the tax code, and it is exactly why so much startup equity is structured to qualify.

The California QSBS exclusion: how the state actually treats your gain

California gives you none of it. The Franchise Tax Board does not conform to §1202, so the full federal exclusion is added straight back on your California return. Whatever the IRS lets you walk away from, California still taxes — as ordinary income, with no preferential capital-gains rate, at brackets that top out at 13.3% (12.3% plus the 1% Mental Health Services Tax on income over $1,000,000).

This is the single most important distinction between federal and state-level QSBS planning. A clean $10M federal exclusion in California still leaves you with a six- or seven-figure state tax bill, because the state taxable gain equals the entire gain — the §1202 exclusion simply doesn't apply at the California level.

Worked examples (California, 2025)

Each scenario below uses the EquityTax engine to compute the California state tax on a QSBS sale, modeling the gain as long-term capital gain stacked on the seller's W-2 income. The federal numbers assume §1202 eligibility (5-year hold, eligible C-corp, non-excluded industry) and a gain at or under the $10M / 10×-basis cap, so the federal exclusion is the full gain.

Example 1 — Early employee, single filer

Inputs: $180K salary, single filer, $1,500,000 QSBS gain on stock with a $15,000 cost basis (exclusion cap = $10,000,000).

Result:

• Federal capital gain (before §1202): $1,500,000
• Federal §1202 exclusion: $1,500,000
• Federal tax owed: $0
• California taxable gain: $1,500,000
• California tax owed: $180,869.73
• Combined effective rate: 12.06%

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Example 2 — Founder, married filing jointly

Inputs: $250K salary, married filing jointly, $5,000,000 QSBS gain on stock with a $200,000 cost basis (exclusion cap = $10,000,000).

Result:

• Federal capital gain (before §1202): $5,000,000
• Federal §1202 exclusion: $5,000,000
• Federal tax owed: $0
• California taxable gain: $5,000,000
• California tax owed: $633,339.46
• Combined effective rate: 12.67%

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Example 3 — Large founder exit, married filing jointly

Inputs: $350K salary, married filing jointly, $10,000,000 QSBS gain on stock with a $500,000 cost basis (exclusion cap = $10,000,000, so the entire gain is federally excluded).

Result:

• Federal capital gain (before §1202): $10,000,000
• Federal §1202 exclusion: $10,000,000
• Federal tax owed: $0
• California taxable gain: $10,000,000
• California tax owed: $1,302,339.46
• Combined effective rate: 13.02%

Run this scenario in the calculator →

Notice the pattern: the federal tax is $0 in every case, but the California bill climbs from roughly $180K to over $1.3M as the gain grows. The combined effective rate creeps toward 13.3% because more of the gain stacks into California's top bracket. There is no California QSBS exclusion to blunt any of it.

Eligibility checklist (federal)

QSBS is unforgiving on eligibility — miss any of these and the federal exclusion evaporates too:

1. 5-year hold from issuance to sale.
2. Original issuance — you must have acquired the stock directly from the company (not a secondary buy), with limited carve-outs for inheritance and gift.
3. C-corporation — at issuance and continuously through the hold period.
4. Active business — at least 80% of assets must be used in a qualified trade or business.
5. Aggregate gross assets ≤ $50M at all times before and immediately after issuance.
6. Excluded industries — services, banking, farming, and several others are not eligible.

Clearing all six gets you the federal exclusion. It does nothing for California — the state add-back applies regardless of how clean your §1202 qualification is.

Open the calculator with your inputs →

Frequently asked questions

Does California conform to the federal QSBS exclusion?

No. California does not conform to IRC §1202, so the federal exclusion is added back on your California return and the entire gain is taxed at California ordinary rates (FTB).

What rate does California charge on a QSBS sale?

California taxes the gain as ordinary income with no preferential capital-gains rate. Brackets run up to 13.3% (12.3% plus the 1% Mental Health Services Tax on income over $1,000,000).

If my $10M gain is fully federally excluded, do I owe anything?

You owe $0 federal but still owe California tax on the full gain. In the large-founder example above, a $10,000,000 fully-excluded federal gain still produced a California tax bill of $1,302,339.46.

Can I avoid the California tax by moving before I sell?

Sometimes, but residency and sourcing rules are fact-specific and the FTB scrutinizes pre-sale moves closely. This is a CPA conversation, not a DIY one — see the warning above.

Sources

• 26 U.S.C. § 1202 — Partial exclusion for gain from certain small business stock.
• Internal Revenue Code §1202 — Partial exclusion for gain from certain small business stock (the QSBS exclusion authority).
• California Revenue Department — state capital gains and QSBS conformity.
• EquityTax California QSBS Calculator (internal engine, last verified 2026-05-09).

Estimate only — not financial or tax advice. Consult a qualified CPA before making decisions about exercising stock options, selling equity, or other financial moves.