Qualified Insights
Qualified Insights
Qualified Insights
What is QSBS stacking?
Apr 4, 2025
Quick Overview
QSBS stacking is a strategic tax planning technique that allows founders, investors, and early employees to multiply their Qualified Small Business Stock exclusion benefits by holding shares in different entities. By thoughtfully "stacking" QSBS benefits across multiple trusts or family members, you can potentially exclude tens or even hundreds of millions in capital gains from taxation, rather than being limited to the standard $10 million per taxpayer cap.
Understanding QSBS Stacking Fundamentals
If you've read my previous article on QSBS basics, you know that Section 1202 of the Internal Revenue Code offers an incredible benefit: up to 100% exclusion on capital gains from qualified small business stock held for at least 5 years, capped at the greater of $10 million or 10x your basis.
But what if your company grows substantially, and your potential gain far exceeds that $10 million cap? Or what if you live in a state that does not recognize the federal exclusion and still collects tax on your gains (CA, NJ, AL, MS, PA). That's where QSBS stacking comes in.
QSBS stacking is essentially about multiplying that $10 million exclusion by distributing stock ownership across multiple taxpayers. Each qualifying taxpayer—whether an individual, trust, or entity—gets their own separate exclusion amount.
Many founders will start thinking about their QSBS strategy as their company begins to scale around the Seed or Series A. For tax purposes, it’s better to give shares to your family members when the valuation is low. This will make less of an impact on your lifetime gift tax exemption. When you gift equity to a trust for each trust becomes a separate taxpayer with its own $10 million exclusion capability.
How QSBS Stacking Works in Practice
The mechanics of QSBS stacking are straightforward in concept but require precision in execution:
Identify qualified QSBS stock that meets all Section 1202 requirements
Gift or transfer portions of this stock to different taxpaying entities (trusts, family members, etc.)
Ensure each transfer maintains QSBS eligibility (critical!)
Track holding periods for each recipient
Document everything meticulously
The most common stacking vehicles include:
Irrevocable trusts for family members
Direct gifts to family members (spouse, children, parents)
Spousal Lifetime Non-grantor Trusts (SLANTs)
Intentionally Defective Grantor Trusts (IDGTs)
Each of these vehicles becomes a separate taxpayer eligible for its own QSBS exclusion amount. With careful planning, a founder with $50 million in potential gains could potentially shield most or all of it from capital gains tax.
The Legal Foundation for QSBS Stacking
You might be wondering: "Is this actually legal?" The answer is yes—when done correctly.
The IRS has recognized that the QSBS exclusion applies on a per-taxpayer basis. Section 1202(b)(1) specifically states that the exclusion applies to "a taxpayer," and qualified transfers do not disrupt the holding period or QSBS status.
However, there are important guidelines to follow:
The transfer must be a legitimate gift or trust arrangement, not a disguised sale
The original acquisition requirements must have been met
The holding period includes the transferor's holding time (tacking)
The transfer documentation must be properly executed
Pro Tip: The timing of your stacking strategy matters enormously. Implement it early when your company valuation is still low to maximize the number of shares you can transfer within gift tax exemption limits.
Potential Pitfalls to Avoid
While QSBS stacking is powerful, there are several ways it can go wrong:
Missed documentation: Failing to file gift tax returns or trust documents properly
Disqualifying transactions: Certain redemptions or reorganizations can invalidate QSBS status
Improper trust structures: Not all trusts qualify as separate taxpayers for QSBS purposes
State tax complications: Some states don't conform to federal QSBS treatment
Exceeding gross asset thresholds: Monitoring the $50 million gross asset limit is crucial
When I was setting this up for myself, I discovered that California didn't conform to federal QSBS treatment. This informed our decision to establish trusts in Nevada, which offered more favorable tax treatment.
Latest Developments in QSBS Stacking
The landscape for QSBS stacking continues to evolve. Recent tax court cases have generally supported legitimate stacking strategies, but Treasury regulations could change in the future.
In 2023-2024, there were discussions about potential legislative changes to Section 1202, including possible limitations on stacking techniques. However, as of my writing this article, stacking remains a viable and powerful strategy when implemented correctly. Under the current administration it’s likely to stay in place.
Key Takeaways
QSBS stacking allows you to multiply the $10 million exclusion cap by distributing stock to multiple taxpaying entities
Common stacking vehicles include irrevocable trusts, direct gifts to family members, and specialized trust structures
Timing is critical—implement stacking early when valuations are lower
Proper documentation and adherence to transfer requirements are essential
State tax considerations may influence your stacking strategy (this is why we custody all of our trusts in Nevada)
Your holding period is transferable, meaning if you transfer equity to someone on year 3 of your holding period, they only need to hold the stock for 2 more years for it to be QSBS eligible
Disclaimer
Tax laws are complex and constantly evolving. While this article provides general information about QSBS stacking, it should not be considered legal or tax advice. Each situation is unique, and tax treatment can vary based on individual circumstances. Always consult with qualified tax and legal professionals before making decisions based on the information provided here.
Ready to start planning your QSBS stacking strategy? Promissory streamlines the entire QSBS stacking process from legal document creation to trust custody in Nevada and even valuation of private company assets—all in one platform for a fraction of the cost of traditional attorney services. Create an account today and maximize your future wealth.
By Brian Lamb
By Brian Lamb
Quick Overview
QSBS stacking is a strategic tax planning technique that allows founders, investors, and early employees to multiply their Qualified Small Business Stock exclusion benefits by holding shares in different entities. By thoughtfully "stacking" QSBS benefits across multiple trusts or family members, you can potentially exclude tens or even hundreds of millions in capital gains from taxation, rather than being limited to the standard $10 million per taxpayer cap.
Understanding QSBS Stacking Fundamentals
If you've read my previous article on QSBS basics, you know that Section 1202 of the Internal Revenue Code offers an incredible benefit: up to 100% exclusion on capital gains from qualified small business stock held for at least 5 years, capped at the greater of $10 million or 10x your basis.
But what if your company grows substantially, and your potential gain far exceeds that $10 million cap? Or what if you live in a state that does not recognize the federal exclusion and still collects tax on your gains (CA, NJ, AL, MS, PA). That's where QSBS stacking comes in.
QSBS stacking is essentially about multiplying that $10 million exclusion by distributing stock ownership across multiple taxpayers. Each qualifying taxpayer—whether an individual, trust, or entity—gets their own separate exclusion amount.
Many founders will start thinking about their QSBS strategy as their company begins to scale around the Seed or Series A. For tax purposes, it’s better to give shares to your family members when the valuation is low. This will make less of an impact on your lifetime gift tax exemption. When you gift equity to a trust for each trust becomes a separate taxpayer with its own $10 million exclusion capability.
How QSBS Stacking Works in Practice
The mechanics of QSBS stacking are straightforward in concept but require precision in execution:
Identify qualified QSBS stock that meets all Section 1202 requirements
Gift or transfer portions of this stock to different taxpaying entities (trusts, family members, etc.)
Ensure each transfer maintains QSBS eligibility (critical!)
Track holding periods for each recipient
Document everything meticulously
The most common stacking vehicles include:
Irrevocable trusts for family members
Direct gifts to family members (spouse, children, parents)
Spousal Lifetime Non-grantor Trusts (SLANTs)
Intentionally Defective Grantor Trusts (IDGTs)
Each of these vehicles becomes a separate taxpayer eligible for its own QSBS exclusion amount. With careful planning, a founder with $50 million in potential gains could potentially shield most or all of it from capital gains tax.
The Legal Foundation for QSBS Stacking
You might be wondering: "Is this actually legal?" The answer is yes—when done correctly.
The IRS has recognized that the QSBS exclusion applies on a per-taxpayer basis. Section 1202(b)(1) specifically states that the exclusion applies to "a taxpayer," and qualified transfers do not disrupt the holding period or QSBS status.
However, there are important guidelines to follow:
The transfer must be a legitimate gift or trust arrangement, not a disguised sale
The original acquisition requirements must have been met
The holding period includes the transferor's holding time (tacking)
The transfer documentation must be properly executed
Pro Tip: The timing of your stacking strategy matters enormously. Implement it early when your company valuation is still low to maximize the number of shares you can transfer within gift tax exemption limits.
Potential Pitfalls to Avoid
While QSBS stacking is powerful, there are several ways it can go wrong:
Missed documentation: Failing to file gift tax returns or trust documents properly
Disqualifying transactions: Certain redemptions or reorganizations can invalidate QSBS status
Improper trust structures: Not all trusts qualify as separate taxpayers for QSBS purposes
State tax complications: Some states don't conform to federal QSBS treatment
Exceeding gross asset thresholds: Monitoring the $50 million gross asset limit is crucial
When I was setting this up for myself, I discovered that California didn't conform to federal QSBS treatment. This informed our decision to establish trusts in Nevada, which offered more favorable tax treatment.
Latest Developments in QSBS Stacking
The landscape for QSBS stacking continues to evolve. Recent tax court cases have generally supported legitimate stacking strategies, but Treasury regulations could change in the future.
In 2023-2024, there were discussions about potential legislative changes to Section 1202, including possible limitations on stacking techniques. However, as of my writing this article, stacking remains a viable and powerful strategy when implemented correctly. Under the current administration it’s likely to stay in place.
Key Takeaways
QSBS stacking allows you to multiply the $10 million exclusion cap by distributing stock to multiple taxpaying entities
Common stacking vehicles include irrevocable trusts, direct gifts to family members, and specialized trust structures
Timing is critical—implement stacking early when valuations are lower
Proper documentation and adherence to transfer requirements are essential
State tax considerations may influence your stacking strategy (this is why we custody all of our trusts in Nevada)
Your holding period is transferable, meaning if you transfer equity to someone on year 3 of your holding period, they only need to hold the stock for 2 more years for it to be QSBS eligible
Disclaimer
Tax laws are complex and constantly evolving. While this article provides general information about QSBS stacking, it should not be considered legal or tax advice. Each situation is unique, and tax treatment can vary based on individual circumstances. Always consult with qualified tax and legal professionals before making decisions based on the information provided here.
Ready to start planning your QSBS stacking strategy? Promissory streamlines the entire QSBS stacking process from legal document creation to trust custody in Nevada and even valuation of private company assets—all in one platform for a fraction of the cost of traditional attorney services. Create an account today and maximize your future wealth.
By Brian Lamb
