Introduction
You may have heard that Qualified Small Business Stock (QSBS) offers a 0% tax rate, but in California, this is where myths and reality diverge sharply.
In this 2025 guide, we’ll unpack whether California honors IRC §1202 exclusions, how state sourcing affects your gain, and what founders need to know about myth-busting QSBS treatment at the state level.
IRS and California Tax Code References
- IRC §1202 – Federal QSBS exclusion for capital gains
- R&TC §18038.5 (repealed) – Former CA conformity with §1202
- FTB Guidance (Legal Rulings & Notices) – CA treatment of capital gains
The Myth: California Honors QSBS 100% Like the IRS
False. California does not conform to federal QSBS exclusion under IRC §1202.
What this means:
- Federally, you may exclude up to $10 million in QSBS gain
- California still taxes 100% of that gain under Personal Income Tax (PIT)
Unless this changes in 2025 (no bill pending yet), founders must pay full PIT even if they qualify federally.
Example: California Founder Selling QSBS in 2025
Example: Priya sells QSBS stock in her C-Corp startup in 2025. She qualifies federally for the $10M gain exclusion under §1202.
- On her federal return, she excludes the gain
- On her California PIT return, she pays tax on the entire $10M gain
Result: ~13.3% California PIT due even though she’s exempt federally.
Step-by-Step: What CA Founders Should Do in 2025
- Track Federal QSBS Eligibility
Hold stock for 5 years, meet active business requirements, and ensure C-Corp status. - Prepare for California Tax
Model out the CA tax bill separately you won’t get the exclusion here. - Consider Partial-Year Residency Planning
If you move out before sale, CA may still source part of the gain under R&TC §17952. - Maintain Detailed Stock Records
Your QSBS treatment depends on precise acquisition, holding, and corporate structure data. - Document for Future Reform
Keep records that may help if California ever adopts partial conformity again.
Conclusion
Don’t fall for the myth: California does not offer a 0% tax rate on QSBS.
While the federal exclusion under IRC §1202 can be transformative, CA founders still face a significant PIT burden on exit. Plan accordingly the difference could be millions.
Call to Action
Planning a QSBS exit from California?
Book a strategic tax review with Anshul Goyal, CPA, EA, FCA
Anshul can help you:
- Determine QSBS qualification under IRC §1202
- Model out California vs. federal tax impact
- Create a residency or trust strategy for exits
Don’t let myths cost you money:
https://calendly.com/anshulcpa/
Anshul Goyal, CPA, EA, FCA
Anshul brings 15+ years of U.S. and international tax experience. He specializes in helping online sellers, foreign founders, and U.S. residents with IRS and multi-state compliance. Known for his deep knowledge in Shopify and Amazon seller tax strategy, Anshul has helped hundreds of entrepreneurs minimize taxes and scale legally.
Disclaimer
This blog is for informational purposes only and does not constitute legal or tax advice. Please consult a qualified tax professional regarding your individual tax situation.
Top 5 High-Searched FAQs for 2025
1. Does California recognize QSBS tax exclusions?
No. California does not conform to IRC §1202.
2. Will I still pay CA taxes if I qualify federally for QSBS?
Yes. The full gain is taxed under California PIT.
3. Can moving out of CA help avoid tax on QSBS?
Partially. Sourcing rules still apply based on where services were performed.
4. Is there any California bill to restore QSBS exclusion?
Not as of 2025. R&TC §18038.5 was repealed in 2013.
5. Do other states conform to §1202?
Some do. Check state-specific conformity rules.