Section 1202 exclusion cap
Also: Section 1202 cap, QSBS exclusion cap, 10x basis cap, $10M QSBS cap
The per-issuer limit on QSBS gain excluded from federal tax: the greater of $10 million or 10 times the shareholder's adjusted basis in the stock, measured separately for each QSBS issuer.
Section 1202(b) caps the per-issuer QSBS exclusion at the greater of $10 million or 10 times the taxpayer’s adjusted basis in the stock. The $10 million cap is lifetime per issuer, but the 10 times basis cap is per tax year. For an employee who exercised options for $100,000, the $10 million cap dominates. For a founder who purchased founder shares for $2 million, the 10x cap produces a $20 million exclusion. Married couples are treated as one taxpayer.
Example: a founder exercised options for $1.5 million in 2019 and sells the QSBS for $18 million in 2025 at $16.5 million of gain. The $10 million floor is beaten by 10 times basis ($15 million). The full $16.5 million gain exceeds the $15 million cap, so $15 million is excluded and $1.5 million is taxed at long-term capital gain rates.
Common mistake: planning a single large sale when multi-year sales could stay under the 10x basis cap in each year, or splitting shares across family members via gifts to multiply the $10 million floors.
The cap matters at large exit planning, at gifting QSBS to children or trusts before a sale, and at restructuring founder holdings to expand the aggregate exclusion.