Qualified Small Business Stock (QSBS) offers a massive tax advantage for founders and early-stage investors. Under Section 1202 of the IRS code, you can potentially pay 0% in federal capital gains tax on up to $10 million or 10x your initial investment. To qualify, your stock must be in a C-corporation and held for at least five years.
While the federal benefits are clear, QSBS tax treatment varies significantly from state to state. Understanding these differences is crucial for maximizing your financial outcome. For those in states with unfavorable QSBS laws, a specialized trust can be a powerful tool to unlock these tax savings.
In this guide, we'll break down how each state handles QSBS and explore how strategic trust planning can help you secure the full tax exemption, regardless of where you live.
How does each state treat QSBS?
The map and table below show how each state treats QSBS.
- Full QSBS benefit: These states follow the federal QSBS rules. This means you’ll get the same QSBS federal tax benefits at state level too.
- No state income tax: This means QSBS gains are not subject to any state income tax. If you receive capital gains from QSBS, you won’t pay state taxes on these gains.
- No state capital gains tax: This means there’s no state tax on capital gains for individuals. If you receive capital gains from QSBS in these states, you won’t pay any state taxes on the gains.
- Partial state QSBS benefit: This means you may receive some state tax benefits, but they won’t be as favorable as states that fully conform to federal QSBS.
- No state QSBS benefit: This means you won’t receive any tax benefits for QSBS at state level.
| State | How QSBS is treated |
|---|---|
| Alabama | No state QSBS benefit |
| Alaska | No state income tax |
| Arizona | Full QSBS benefit |
| Arkansas | Full QSBS benefit |
| California | No state QSBS benefit |
| Colorado | Full QSBS benefit |
| Connecticut | Full QSBS benefit |
| Delaware | Full QSBS benefit |
| Florida | No state income tax |
| Georgia | Full QSBS benefit |
| Hawaii | Partial state QSBS benefit |
| Idaho | Full QSBS benefit |
| Illinois | Full QSBS benefit |
| Indiana | Full QSBS benefit |
| Iowa | Full QSBS benefit |
| Kansas | Full QSBS benefit |
| Kentucky | Full QSBS benefit |
| Louisiana | Full QSBS benefit |
| Maine | Full QSBS benefit |
| Maryland | Full QSBS benefit |
| Massachusetts | Full QSBS benefit |
| Michigan | Full QSBS benefit |
| Minnesota | Full QSBS benefit |
| Mississippi | No state QSBS benefit |
| Missouri | Full QSBS benefit |
| Montana | Full QSBS benefit |
| Nebraska | Full QSBS benefit |
| Nevada | No state income tax |
| New Hampshire | No state capital gains tax |
| New Jersey | No state QSBS benefit |
| New Mexico | Full QSBS benefit |
| New York | Full QSBS benefit |
| North Carolina | Full QSBS benefit |
| North Dakota | Full QSBS benefit |
| Ohio | Full QSBS benefit |
| Oklahoma | Full QSBS benefit |
| Oregon | Full QSBS benefit |
| Pennsylvania | No state QSBS benefit |
| Rhode Island | Full QSBS benefit |
| South Carolina | Full QSBS benefit |
| South Dakota | No state income tax |
| Tennessee | No state capital gains tax |
| Texas | No state income tax |
| Utah | Full QSBS benefit |
| Vermont | Full QSBS benefit |
| Virginia | Full QSBS benefit |
| Washington | No state income tax |
| West Virginia | Full QSBS benefit |
| Wisconsin | Full QSBS benefit |
| Wyoming | No state income tax |
I don’t live in a QSBS-friendly state. How can I maximize my tax saving on my QSBS?
If you live in a state that doesn’t offer the same QSBS exclusions that are available at the federal level (specifically California, Pennsylvania, New Jersey, Mississippi, and Alabama), you may feel like you're missing out. But there's a powerful strategy available.
The solution can be to transfer your shares to an irrevocable trust located in a QSBS-friendly state, like Nevada or Delaware. This is a strategy used by sophisticated investors and founders to legally minimize or eliminate state capital gains tax on their QSBS gains.
By setting up a specialized trust, such as a Nevada Incomplete Gift Non-Grantor (NING) Trust, you can move your stock into a vehicle that resides in a zero-income-tax state. When the stock is sold, the gains are sourced to the trust's home state, not your state of residence. This can save you millions of dollars in taxes.
At Dynasty, we simplify the process of creating and managing trusts that can help you achieve your financial goals, including navigating the complexities of QSBS tax planning.