Venture Capital Taxation, IRC Section 1202 QSBS & Founder Exits
IRC Section 1202 QSBS Gain Exclusion Cap (10x Basis) Formula
Calculate IRC Section 1202 Qualified Small Business Stock Per-Issuer Exclusion Cap ($M), Excluded Federal Gain ($M), Residual Taxable Gain ($M), and Federal Cash Tax Saved ($M).
Do not hardcode a flat $10M QSBS cap—IRC §1202(b)(1) grants the GREATER of $10M or 10x cost basis!
Under IRC Section 1202, original-issue domestic C-corporation Qualified Small Business Stock (QSBS, <= $50M aggregate gross assets at issuance) acquired after September 27, 2010 and held strictly longer than 5 years qualifies for a 100% federal capital-gain and 3.8% NIIT exclusion up to a per-taxpayer, per-issuer ceiling! A widespread venture-tax modeling error is capping the exclusion at a flat $10.00M: IRC §1202(b)(1) sets the ceiling to MAX($10.00M, 10 * Adjusted_Basis)! While a founder holding $0.05M par-value stock uses the $10.00M floor, a seed investor who wired $2.50M directly for Series Seed preferred stock unlocks a 10 * $2.50M = $25.00M tax-free cap!
Verify on a Series Seed VC Exit—Exit_Proceeds = $32.00M (B2), Original_Cash_Basis = $2.50M (B3 -> $29.50M realized gain), Holding_Period = 6.0 years (>= 5 years, B4), and Combined_Fed_LTCG_NIIT_Rate = 0.238 (23.8%, B5): Section 1202 Exclusion Cap equals MAX(10, 10 * 2.50) = $25.00M (E2), Excluded Tax-Free Gain is $25.00M (E3), Residual Taxable Gain is 29.50 - 25.00 = $4.50M (E4), and Federal Cash Tax Saved hits 25.00 * 0.238 = $5.95M (E5)!
| IRC §1202 QSBS Exit Metric ($32.0M Exit, $2.5M Seed Basis, 6 Yrs, 23.8% Rate) | Formula | Verified Output |
|---|---|---|
| Section 1202 Exclusion Cap ($M) | IF(Years < 5, 0, MAX(10, 10 * Basis_M)) | $25.00M ($10.00M Founder Par) |
| Excluded Tax-Free Gain ($M) | MIN(MAX(0, Exit_M - Basis_M), Cap_M) | $25.00M ($0.00M if < 5 Yrs) |
| Residual Taxable Gain ($M) | MAX(0, (Exit_M - Basis_M) - Excluded_M) | $4.50M ($4.95M Founder @ $15M) |
| Federal Tax Saved ($M) | Excluded_Gain_M * Fed_LTCG_NIIT_Rate | $5.95M ($2.38M Founder) |
Section 1202 Greater-of-$10M-or-10x-Basis Exclusion Formula
Validate Exit_Proceeds > 0, Cash_Basis >= 0, Holding_Years > 0, and Tax_Rate in (0, 0.45]!
=LET(ex_p, B2, bs_m, B3, yr_h, B4, tx_r, B5, IF(OR(ex_p <= 0, bs_m < 0, yr_h <= 0, tx_r <= 0, tx_r > 0.45), "Invalid QSBS Input", LET(gn_r, MAX(0, ex_p - bs_m), cp_m, IF(yr_h < 5, 0, MAX(10, 10 * bs_m)), ROUND(MIN(gn_r, cp_m), 2))))Founder Par-Basis Floor & Early <5-Year Disqualification Checks
Test a founder exit with B2 = $15.00M and nominal par basis B3 = $0.05M: Cap E2 floors at $10.00M (not 10 * 0.05 = $0.50M!), excluding $10.00M E3 and leaving $4.95M taxable E4 ($2.38M tax saved E5). Then test selling early at B4 = 4.0 years (< 5-year cliff without a §1045 rollover): Excluded Gain E3 drops immediately to $0.00M!
=IF(ISTEXT(E3), E3, ROUND(E3 * B5, 2))Try the example
Use the original values or change them to test your understanding.