QSBS Tax Planning
Is QSBS Taxed at 28%? Understanding the AMT and the Section 1202 Exclusion
For most founders with post-2010 QSBS, federal gains can be excluded entirely, but the alternative minimum tax (AMT) and older exclusion tiers create real 28% exposure that demands careful pre-liquidity planning.
The Direct Answer
Is QSBS Taxed at 28%?
The short answer: it depends on when the stock was acquired and which exclusion tier applies. For qualified small business stock (QSBS) acquired after September 27, 2010, Section 1202 of the Internal Revenue Code allows eligible taxpayers to exclude 100% of the gain from both regular income tax and the alternative minimum tax (AMT). In that scenario, the 28% AMT rate does not apply.
However, for QSBS acquired under an earlier exclusion tier (specifically the 50% exclusion available before February 18, 2009, or the 75% exclusion available between that date and September 27, 2010) a portion of the gain is not excluded and may be subject to AMT at the 28% preferential rate for collectibles and certain capital gains items. Additionally, for any excluded gain under the pre-2010 tiers, 7% of the excluded amount is treated as an AMT preference item, which can generate a meaningful AMT liability even on gain that is technically "excluded" from regular tax.
The practical result: founders with qualifying 100% exclusion QSBS have no 28% AMT exposure on those shares, while those holding older exclusion-tier QSBS (or those whose QSBS has been partially disqualified) may face real AMT liability. Individual circumstances vary significantly, and the interaction between AMT and QSBS is one of the more technically complex areas of founder tax planning.
Key Definitions
Three Terms Founders Need to Understand Before Exit
These concepts interact at the point of sale. Confusing them is one of the most common and costly mistakes in founder tax planning.
Section 1202 QSBS Exclusion
A federal tax provision that allows eligible shareholders of qualified small business stock to exclude up to 100% of capital gains on sale, subject to a per-issuer cap of $10 million or 10 times the adjusted basis, whichever is greater. The exclusion percentage varies by acquisition date.
Alternative Minimum Tax (AMT)
A parallel tax system designed to ensure high-income taxpayers pay a minimum level of tax. Under the AMT, certain "preference items" (including a portion of QSBS exclusions from pre-2010 stock) are added back to income before applying the AMT rate. As of 2026, the AMT applies a 26% rate up to a threshold and 28% above it on AMTI (alternative minimum taxable income).
AMT Preference Item
A specific income item that must be added back to income when calculating the AMT. For QSBS under the 50% or 75% exclusion tiers, 7% of the excluded amount is a preference item. This means even the "excluded" portion of pre-2010 QSBS gain can generate an AMT liability, effectively reducing the value of the exclusion.
Exclusion Tiers Explained
Which QSBS Tier Determines Your AMT Exposure
Section 1202 has gone through three distinct exclusion tiers since its enactment in 1993. The tier that applies to your shares is determined entirely by the date the stock was originally acquired, not the date of sale. This distinction has large consequences for AMT planning.
According to IRS guidance under Section 1202, the 7% AMT preference item only applies to the 50% and 75% exclusion tiers. The 100% exclusion tier (which Congress made permanent for stock acquired after September 27, 2010) eliminates both the regular tax gain and the AMT preference item entirely on qualifying shares.
For most founders whose companies were incorporated after 2010 and who have held shares for at least five years at the time of sale, the 100% exclusion tier is the applicable rule, meaning no regular tax and no AMT on excluded gains, subject to the per-issuer cap. However, early-stage founders who received stock from companies incorporated before this cutoff may hold a mix of tiers, and each tranche must be analyzed individually.
| Acquisition Period | Exclusion % | AMT Preference Item? | 28% AMT Risk |
|---|---|---|---|
| Pre-Feb 18, 2009 | 50% | Yes (7% of excluded gain) | High |
| Feb 18, 2009 to Sep 27, 2010 | 75% | Yes (7% of excluded gain) | Moderate |
| After Sep 27, 2010 | 100% | No | None (on qualifying gain) |
Source: Internal Revenue Code Section 1202. Tax treatment depends on individual circumstances. This table reflects general federal rules as of 2026 and does not constitute tax advice.
How the 28% Rate Works
Why the 28% Rate Gets Cited, and When It Actually Applies
The 28% rate associated with QSBS taxation stems from two distinct but related mechanisms, and founders often conflate them.
Mechanism 1: The AMT Preference Item on Pre-2010 QSBS. When a taxpayer excludes gain under the 50% or 75% exclusion tiers, 7% of the excluded amount is added back to income as an AMT preference item. This preference income is then subject to the AMT rate, which caps at 28% on amounts above the AMT rate threshold (approximately $116,300 for single filers in 2026, before phaseouts). The result is an effective AMT cost that reduces the true value of the older QSBS exclusion.
Mechanism 2: Non-Excluded Gain on Partial Exclusion Tiers. Under the 50% exclusion, half of the gain is included in income. Under the 75% exclusion, 25% of the gain is included. This included gain is subject to the regular capital gains rate (typically 20% at the highest federal bracket, plus the 3.8% Net Investment Income Tax (NIIT)), not 28%. The 28% rate does not separately apply to the non-excluded portion unless the AMT calculation produces a higher tax than the regular tax, in which case the AMT rate governs.
An Illustrative Example (for conceptual purposes only). Consider a founder who acquired QSBS under the 50% exclusion tier and realizes $10 million in gain at sale. Under the 50% tier, $5 million is excluded from regular tax. However, 7% of that $5 million (or $350,000) becomes an AMT preference item. Depending on the taxpayer's total AMT position, this preference item could trigger AMT liability at a rate up to 28% on that $350,000 increment. Meanwhile, the remaining $5 million of non-excluded gain is taxed at regular long-term capital gains rates. The net tax outcome depends heavily on the taxpayer's full financial picture, including other AMT adjustments, credits, and income sources.
Individual tax outcomes vary materially based on filing status, total income, other preference items, and state tax rules. Founders approaching a liquidity event should work with qualified advisors to model their specific AMT exposure before the transaction closes, not after.
Planning Note
For 100% exclusion QSBS acquired after September 27, 2010, neither the AMT preference item nor the 28% rate applies to qualifying excluded gain. This is one reason why the post-2010 statutory change significantly enhanced the value of QSBS for founders of companies formed after that date.
Pre-Liquidity Planning
Why AMT and QSBS Planning Must Happen Before the Sale
The window to address AMT exposure on QSBS gains is before the transaction closes. Once a sale is complete, the tax treatment is largely locked in. Founders who engage qualified advisors early (typically years before a liquidity event) have several planning levers available that disappear at closing.
Verify Exclusion Tier for Each Tranche
Founders who received stock in multiple rounds or who have shares from different vintage years may hold multiple exclusion tiers on the same company. Each tranche carries its own AMT treatment and must be analyzed individually before sale.
Model AMT Before the Transaction
Founders should run a full AMT projection that includes the QSBS preference item, other AMT adjustments, ISO exercises, and state-level tax treatment. AMT exposure can vary dramatically based on the taxpayer's full financial picture, and surprises at filing are expensive and unrecoverable.
Consider the QSBS Stacking Strategy
QSBS stacking (the structured transfer of QSBS-eligible shares to multiple taxpayers or trust entities before sale) can multiply the per-issuer cap across several holders. When structured properly before a liquidity event, this approach may significantly reduce overall taxable gain, including AMT exposure on pre-2010 tiers. See our QSBS stacking guide for details.
Coordinate with Pennsylvania State Tax Rules
Pennsylvania does not conform to the federal QSBS exclusion under Section 1202. Gain that is fully excluded at the federal level may still be taxable in Pennsylvania at the state's 3.07% flat income tax rate. For founders selling a Pennsylvania-based company, this adds a separate layer of planning complexity. See our guide to selling a business in Pennsylvania.
Confirm QSBS Eligibility Ahead of Closing
AMT planning is irrelevant if QSBS eligibility is disqualified at or before sale. Common disqualification triggers include company size exceeding the $50 million gross asset test at the time of issuance, stock acquired through secondary purchase, or holding period falling short of five years. See our page on the 80% active business rule for QSBS for qualification requirements.
Evaluate Fee-Only Fiduciary Guidance
QSBS and AMT planning requires integrated tax, legal, and investment coordination. Working with a fee-only, fiduciary advisor (rather than a product-driven firm) reduces the risk of conflicted advice at a moment when the stakes are highest.
Founded by Entrepreneurs
QSBS Complexity Requires More Than a Checklist
At Defiant Capital Group, Jonathan Dane, CFA, CFP, and the advisory team work with founders and entrepreneurs navigating the intersection of QSBS eligibility, AMT exposure, estate planning, and Pennsylvania-specific tax rules, often in the same transaction.
Our approach is to begin planning years before a liquidity event, model the full tax picture across federal and state layers, and coordinate with founders' legal and accounting teams so that nothing is left to resolve after closing. As an independent, always-fiduciary RIA, our recommendations are driven by what is right for each client's situation, not by products or institutional relationships.
Schedule a ConsultationCFA
Chartered Financial Analyst designation (Jonathan Dane)
CFP
Certified Financial Planner designation (Jonathan Dane)
RIA
Independent Registered Investment Adviser, always fiduciary
PA
Pittsburgh-based, serving founders nationally and locally
Frequently Asked Questions
QSBS, AMT, and the 28% Rate: Common Questions Answered
What is the tax rate for QSBS gains?
For qualifying QSBS acquired after September 27, 2010, the federal tax rate on excluded gains is effectively 0% (100% of the eligible gain is excluded from both regular income tax and the AMT). For QSBS under the 50% or 75% exclusion tiers (older stock), a portion of the gain remains taxable at regular long-term capital gains rates (up to 20% plus the 3.8% NIIT), and 7% of the excluded amount is an AMT preference item that could result in additional AMT liability. The effective tax rate depends heavily on each taxpayer's individual circumstances, holding period, exclusion tier, and other income.
What capital gains are taxed at 28%?
Under federal law, the 28% capital gains rate applies to gains from collectibles (such as art, coins, and precious metals held over one year) and to certain gains on Section 1202 QSBS that are not excluded. Specifically, for QSBS under the 50% exclusion tier, the included (non-excluded) gain is taxed at a maximum rate of 28% rather than the standard long-term capital gains rate, under a special provision in the tax code. This is a separate mechanism from the AMT preference item. Most gain on 100% exclusion QSBS is not subject to the 28% rate.
How are QSBS sales taxed at the federal level?
Federal taxation of QSBS sales depends on three factors: the exclusion tier that applies (50%, 75%, or 100% based on acquisition date), whether the gain falls within the per-issuer cap ($10 million or 10x adjusted basis), and whether the qualifying holding period of five years has been met. Gain within the cap and meeting all requirements is excluded from federal income tax under the applicable tier. Gain above the cap, gain from disqualified stock, or gain from stock held fewer than five years is taxed at regular capital gains rates. The AMT preference item applies separately for pre-2010 tiers, as described above.
What is the QSBS 60% tax trap?
The "60% tax trap" refers to a scenario where a founder's QSBS gain is large enough to trigger both federal and state taxes in a way that eliminates much of the expected benefit. It most commonly arises when a founder sells QSBS in a state that does not conform to the federal Section 1202 exclusion (such as California, where the gain is fully taxed at the state level up to 13.3%). Pennsylvania similarly does not conform to the federal QSBS exclusion, which means Pennsylvania founders owe state tax at 3.07% on federally excluded gain. When combined with any remaining federal tax and the AMT, total tax obligations can be significantly higher than a founder who assumed a near-zero outcome anticipated.
Does Pennsylvania recognize the QSBS exclusion?
No. Pennsylvania does not conform to the federal QSBS exclusion under Section 1202. Gain that is fully excluded from federal income tax under the 100% exclusion tier remains taxable as capital gain in Pennsylvania at the state's flat 3.07% income tax rate. This is a material planning issue for founders selling Pennsylvania-incorporated businesses. Founders should factor state tax into their total after-tax liquidity calculation well before a sale closes.
Can the AMT preference item on QSBS be offset by AMT credits?
In some cases, yes. The AMT system allows taxpayers to carry forward AMT credits from prior years when they paid AMT and to apply those credits to reduce regular tax in future years when they are not subject to AMT. However, the ability to use these credits depends on the taxpayer's tax position in subsequent years and is not guaranteed. This is one reason why AMT modeling (including the QSBS preference item) should be done in the context of a multi-year tax projection, not just the year of sale. Tax treatment depends on individual circumstances, and prior AMT credit availability varies.
Related Resources
Continue Building Your QSBS Knowledge
QSBS Stacking for Founders
How to multiply the Section 1202 exclusion across multiple trust entities before a sale, with Pennsylvania-specific considerations and real case study numbers.
Read the GuideLeveraging QSBS Stacking Ahead of Liquidity
A case study illustrating how a founder restructured equity across trust entities to reduce federal business sale taxes and establish QSBS eligibility.
View Case StudyTax Implications of Selling a Business in Pennsylvania
How Pennsylvania's non-conformity with federal QSBS rules, the 3.07% flat income tax, and asset vs. stock sale structure affect your after-tax proceeds.
Read the GuideWork With Defiant Capital Group
QSBS and AMT Planning Requires Expert, Pre-Liquidity Coordination
The tax math on QSBS is only favorable when the planning is done correctly and early. At Defiant Capital Group, our team of CFA and CFP credentialed advisors works with founders approaching liquidity events to model their full tax picture (including AMT exposure, Pennsylvania conformity issues, and QSBS stacking opportunities) before the transaction closes. The window to act is narrower than most founders realize.
(412) 697-1435 | defiant@defiantcap.com | Pittsburgh, PA