New York QSBS Exclusion (2026): §1202 Gain Is Tax-Free at the State Level Too

The New York QSBS exclusion question has a clean answer: New York conforms to federal §1202, so a gain that §1202 zeroes federally is $0 in New York (and New York City) too — unlike California, which decoupled and taxes the full gain.

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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.

How the New York QSBS exclusion works

New York conforms to the federal §1202 exclusion — so there is nothing extra to claim and nothing extra to pay. New York computes your state tax starting from your federal adjusted gross income (New York Tax Law §612(a)), and because §1202 removes the QSBS gain from federal gross income, that gain is never in your federal AGI — so it never enters your New York income either. There is no New York add-back for the exclusion. The result: a gain that §1202 zeroes federally is $0 to New York State and $0 to New York City as well.

New York's top rate is 10.9% and New York City adds up to 3.876% — but you never reach those on excluded QSBS gain, because the gain simply isn't in the New York base. This is the opposite of California, the one major state that decoupled from §1202 (Cal. Rev. & Tax. Code §18152) and taxes the full gain as ordinary income at up to 13.3%.

One caveat worth tracking: a 2026 Albany bill (S8921A) proposed adding a New York §1202 add-back, drafted retroactive to January 1, 2025. It was withdrawn, not enacted — the FY2027 budget preserved QSBS conformity — but the revenue argument behind it hasn't gone away, so confirm the rule still holds before a large exit.

Worked examples (New York, 2026)

Each scenario assumes §1202 eligibility (5-year hold, eligible C-corp, non-excluded industry) and a New York resident. Because New York conforms, the state and city tax on the excluded gain is $0 — what these examples really show is how much federal tax §1202 saves, and that New York doesn't claw any of it back.

Example 1 — Early employee, single filer

Inputs: $180K salary, single filer, $1,500,000 of QSBS gain (basis ~$15,000), New York resident.

Result:

• Federal capital gain (before §1202): $1,500,000
• Federal §1202 exclusion: $1,500,000
• Federal tax owed: $0 — §1202 saves ~$357,000 at the 23.8% long-term capital gains + NIIT rate
• New York taxable gain: $0 (New York conforms — the gain isn't in the NY base)
• New York + NYC tax owed: $0
• For contrast, a California resident would owe up to 13.3% on the same gain

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Example 2 — Founder, married filing jointly

Inputs: $250K household salary, married filing jointly, $5,000,000 of QSBS gain (basis ~$200,000), New York resident.

Result:

• Federal capital gain (before §1202): $5,000,000
• Federal §1202 exclusion: $5,000,000
• Federal tax owed: $0 — §1202 saves ~$1,190,000 at the 23.8% long-term capital gains + NIIT rate
• New York taxable gain: $0 (New York conforms — the gain isn't in the NY base)
• New York + NYC tax owed: $0
• For contrast, a California resident would owe up to 13.3% on the same gain

Run this scenario in the calculator →

Example 3 — Large founder exit, married filing jointly

Inputs: $350K household salary, married filing jointly, $10,000,000 of QSBS gain (basis ~$500,000), New York resident.

Result:

• Federal capital gain (before §1202): $10,000,000
• Federal §1202 exclusion: $10,000,000
• Federal tax owed: $0 — §1202 saves ~$2,380,000 at the 23.8% long-term capital gains + NIIT rate
• New York taxable gain: $0 (New York conforms — the gain isn't in the NY base)
• New York + NYC tax owed: $0
• For contrast, a California resident would owe up to 13.3% on the same gain

Run this scenario in the calculator →

In all three cases §1202 covers the entire gain federally (each is at or under the $10M cap), so the federal bill is $0 — and because New York conforms, the New York and NYC bills are $0 too. The same sale by a California resident would be taxed at up to 13.3% at the state level. New York founders keep the full §1202 win.

Eligibility checklist (federal)

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

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.

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Frequently asked questions

Does New York have its own QSBS exclusion?

New York doesn't need a separate one — it conforms to the federal §1202 exclusion automatically. Because New York starts from your federal AGI and §1202 removes the gain from federal income, the gain is excluded from New York income too. The result is $0 New York tax on the excluded gain.

If §1202 zeroes my federal tax, do I still owe New York?

No. New York has no §1202 add-back, so the federally-excluded gain never enters the New York calculation. Both your federal and your New York bill on the excluded gain are $0.

Does New York City tax a QSBS sale?

No. NYC computes city tax from the same New York taxable income base, so a city resident also owes $0 on the excluded gain. New York City's resident rate can reach 3.876%, but not on excluded QSBS gain.

Is the 5-year holding period a federal or state rule?

It is the federal §1202 requirement. New York's treatment doesn't change it: you still need the five-year hold to claim the federal exclusion in the first place.

Sources

• 26 U.S.C. § 1202 — Partial exclusion for gain from certain small business stock.
• IRS Publication 550 — Investment Income and Expenses (capital gains, §1202 mechanics).
• New York Tax Law § 612(a) — New York AGI starts from federal AGI (the basis for QSBS conformity).
• New York Revenue Department — state capital gains and equity-compensation treatment.
• EquityTax New York 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.