--- title: "California QSBS Exclusion Calculator (2026): §1202 Eligibility and Worked Examples" slug: ca-qsbs-state-exclusion publishedAt: 2026-06-16T17:00:01.000Z updatedAt: 2026-06-17T16:41:54.718Z author: "Mike Navarro" authorSlug: mike-navarro category: "State Tax" tags: ["California", "QSBS", "Section 1202", "Capital Gains", "State Tax"] excerpt: "California QSBS exclusion explained: §1202 wipes out federal tax on up to $10M of gain, but CA gives you $0 state relief. See your CA tax bill in 60 seconds." canonical: https://myequitytax.com/blog/ca-qsbs-state-exclusion --- 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. [**Open the California equity calculator →**](/calculator/iso?state=ca) ## 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](https://www.law.cornell.edu/uscode/text/26/1202)). 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](https://www.irs.gov/individuals/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% [Run this scenario in the calculator →](/calculator/iso?state=ca&w2=180000&gain=1500000) ### 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% [Run this scenario in the calculator →](/calculator/iso?state=ca&w2=250000&gain=5000000) ### 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 →](/calculator/iso?state=ca&w2=350000&gain=10000000) 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. QSBS planning is dense and the rules are not LLM-friendly — small details (e.g. options exercised early vs. at exit, secondaries, redemptions within 2 years of issuance) can disqualify a grant. California layers a hard nonconformity question on top: even perfect §1202 stock is fully taxable here. Talk to a CPA before you sell, especially if a change of residency is on the table. [Open the calculator with your inputs →](/calculator/iso?state=ca) ## 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](https://www.ftb.ca.gov/file/personal/income-types/stock-options.html)). **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](https://www.law.cornell.edu/uscode/text/26/1202) — *Partial exclusion for gain from certain small business stock* (the QSBS exclusion authority). - [California Revenue Department](https://www.ftb.ca.gov/file/personal/income-types/stock-options.html) — 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.