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The Qualified Small Business Stock exemption, or QSBS, is the best tax break around. As a result of Congress’s push early in the new millennium to encourage Americans to start...
Unlock Tax Savings: Discover the power of QSBS packing, a strategy designed to help shareholders maximize their tax savings on qualified small business stock investments.
Simple and Effective: Explore two straightforward QSBS packing methods that can significantly increase your basis in QSBS assets, leading to greater tax savings.
Qualified Small Business Stock offers significant tax benefits for shareholders with stock in eligible small businesses. By understanding the QSBS exemption and employing strategies like QSBS packing, shareholders can increase their asset basis and save on taxes. In this guide, we will explain QSBS packing, the QSBS exemption and various ways to “pack” QSBS investments to maximize tax savings.
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Understanding QSBS and the QSBS Exemption
QSBS refers to stocks issued by certain small C corporations that qualify for special tax breaks under Section 1202 of the Internal Revenue Code. To be considered a Qualified Small Business, or “QSB,” a company must (a) have gross assets not exceeding $50 million before and immediately after the stock issuance and (b) avoid certain business sectors that are explicitly excluded, like consulting, law, accounting, and other service businesses.
The QSBS exemption allows shareholders to exclude a portion or all of the capital gains from the sale of QSBS from federal income tax, provided certain criteria are met:
The stock must be issued by a C corporation meeting the QSB requirements.
The shareholder must acquire the stock directly from the corporation at its original issuance or through a qualified intermediary.
The shareholder must hold the stock for at least five years before selling.
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QSBS packing is a strategic approach that some shareholders use to increase the basis of their QSBS shares and maximize their QSBS exemption. While most people think that the QSBS exclusion applies to $10 million of capital gain, it actually applies to the greater of (1) $10 million of capital gain and (2) 10 times the shareholder’s basis in the stock. This second piece is key. For example, if you invested $3,000,000 in a QSBS eligible asset, you could potentially exclude up to $30 million (10 x $3,000,000) in capital gains from federal tax (and state tax in most cases). As of July 4, 2025 – when the One Big Beautiful Bill Act (OBBBA) was signed – any QSBS issued after that date enjoys a higher exclusion cap. QSBS issued on or before July 4, 2025 is still capped at $10 million (or 10× your investment basis). Beginning after July 4, 2025, the cap increases to $15 million (or 10× basis, whichever is greater). This benefit is available federally and in most states.
These limits apply on a per-company basis, so you can potentially claim QSBS exclusions for multiple companies, with separate limits for each company.
How does this tie to QSBS packing?
There are two primary methods for QSBS packing. The first method involves contributing cash or property worth more than $1 million to the issuing corporation in exchange for QSBS shares. How does this work?
Step 1: An investor invests $4 million of cash in a C corporation.
Step 2: The investor’s basis for the exclusion calculation is determined by referencing the fair market value of the assets contributed, which is $4 million.
Step 3: The increased basis of $4 million allows the investor to exclude up to $40 million (10 x $4 million) of gains from federal tax.
The second method involves selling QSBS stock with a low basis (or grant price) during the same tax year the shareholder sells another batch of the same stock with a high basis. The goal is to increase the total basis of QSBS sold during the taxable year, as the exclusion calculation is determined by reference to the total basis of QSBS stock sold during the year regardless of whether each grant is currently eligible for exclusion under Section 1202. How does this work?
Step 1: A founder sells half of their stock for $40 million that has a basis of $5,000 and would only be able to exclude $10 million with QSBS.
Step 2: The founder sells another grant of the same stock with a high basis during the same tax year, such as from the exercise of stock options where they paid $2 million for the stock.
Step 3: The total basis of QSBS sold during the year is now $2.005 million ($5,000 original basis + $2 million from stock options).
Step 4: The increased total basis of $2.005 million allows the founder to exclude up to $20,050,000 of gains from federal tax.
By using this strategy, the shareholder can effectively double his or her Section 1202 exclusion by packing their basis, taking advantage of the exclusion rather than just the $10 (or $15) million exclusion.
Conclusion
QSBS packing is a powerful strategy for shareholders seeking to maximize their tax savings when investing in small businesses. By understanding the QSBS exemption and employing QSBS packing methods, shareholders can increase their basis in the assets and benefit from substantial tax savings. It is essential to consult with a qualified tax professional when implementing these strategies to ensure compliance with tax laws and regulations. The step-by-step examples provided above illustrate how QSBS packing works in practice, helping shareholders make informed decisions about their investments and tax planning.
We’ve built a platform that makes advanced tax planning – once reserved for ultra-high-net-worth individuals – accessible to everyone. With Valur, you can reduce your taxes by six figures or more, at less than half the cost of traditional providers.
From selecting the right strategy to handling setup, administration, and ongoing optimization, we take care of the hard work so you don’t have to. The results speak for themselves: our customers have generated over $3 billion in additional wealth through our platform.
Mani is the founder and CEO of Valur. He brings deep financial and strategic expertise from his prior roles at McKinsey & Company and Goldman Sachs. Mani earned his degree from the University of Michigan and launched Valur in 2020 to transform how individuals and advisors approach tax planning.
