The median QSBS exclusion is
Not millions. Not a billionaire loophole. Half of all QSBS claimants exclude less than this. A few thousand dollars of startup stock.
The data on Section 1202 tells a different story than the one you've been hearing.
See the evidence ↓You've probably heard that 94% of QSBS benefits go to millionaires. The Treasury data shows why that's misleading.
By number of unique claimants (average income excluding QSBS gains)
Income measured as average Total Positive Income (TPI), excluding QSBS gains. Source: Treasury OTA WP-127, Figure 4.
Count the people, not just the dollars:
74%
of QSBS claimants earn under $1 million
The single largest group (35%) earns $100K-$400K. These are founders and early employees, not millionaires.
ITEP claims: "94% of QSBS exclusions were claimed by people with more than $1 million of annual income."
That's a dollar-weighted stat, not a count of people. Here's how they construct it:
74% of dollars go to people who already earned over $1M before counting QSBS gains
20% of dollars go to people earning under $1M normally, whose one-time startup exit temporarily pushed them over
ITEP lumps both groups to claim 94% "goes to millionaires."
These two groups are the incentive working as designed.
The 74% are investors who funded early-stage companies. The 20% are founders and employees who built them. QSBS connects capital to builders. Both sides show up in the "94%" because both sides took the risk the policy was designed to reward.
Source: U.S. Treasury OTA Working Paper 127, January 2025
Treasury's Working Paper 127 classifies QSBS claimants using Total Positive Income (TPI), the sum of positive income sources on a tax return. Critically, QSBS gains that are excluded from income are also excluded from TPI. This is a deliberate methodological choice: Treasury measures a claimant's regular economic income, not a one-time liquidity event.
Treasury also uses a 3-year average TPI (the current year plus the prior two years) to classify claimants, smoothing out year-to-year volatility. For unique claimant counts, they average TPI over the full 11-year sample period (2012–2022). This methodology is designed to capture a person's typical income level.
Example: A founder earning $150K/year sells their company after 8 years for $2M. By Treasury's methodology (which excludes QSBS gains from income), they're classified in the $100K-$400K income bracket. Not a millionaire. ITEP adds the gain back to reach "94%," reclassifying this person as a millionaire based on a single liquidity event.
ITEP's approach (adding the excluded QSBS gain back into income) directly undoes Treasury's deliberate choice. The result: people with normal incomes who had one successful exit get lumped in with actual high-income earners, inflating the "millionaire" count.
Methodology: Treasury OTA WP-127, Section III ("Data and Sample Construction")
$2,810
Median annual QSBS exclusion
Half of all claimants exclude less than this
75%
claim it exactly once in 11 years
Only 6% claim it five or more years
2.55%
of all capital gains in 2021
QSBS is a rounding error on total cap gains
Senior Engineer
A senior engineer at a 50-person startup exercises $40K in stock after 6 years.
First-time Founder
A first-time founder sells after 8 years for $2M. First liquidity event of their career.
Early Employee
Employee #12 exercises options worth $150K after the company is acquired. Five years of below-market salary.
Seed Investor
Puts $25K into a friend's company. 7 years later it's worth $200K.
Annual exclusion amount by percentile. 90% of claimants exclude less than $591K.
Source: Treasury OTA WP-127, Table 1. Percentiles of annual individual QSBS exclusion claims, 2012-2022.
Distribution data: U.S. Treasury OTA Working Paper 127, January 2025. Archetype examples are illustrative, based on typical QSBS claim profiles.
See what your state actually takes from a qualified small business stock exit under Section 1202.
The median QSBS exclusion is $2,810
State tax on this exit in Alabama
$0
| State | Tax Rate | QSBS Status | Tax on Exit |
|---|---|---|---|
| Texas | 0% | No income tax | $0 |
| Florida | 0% | No income tax | $0 |
| Washington | 7% | conforms | $0 |
| California | 13.3% | decoupled | $0 |
| Oregon | 9.9% | pending | $0 |
| New York | 10.9% | pending | $0 |
The academic evidence is limited but consistent. Both peer-reviewed studies measure the marginal effect of the 2010 expansion to 100% exclusion, not the existence of QSBS itself, and both find significant positive effects.
Investment in startup firms increased by approximately 12% after the 100% exclusion
Method: Within-firm variation comparing funding rounds before/after SBJA 2010
Chen & Farre-Mensa (2023/2025) ↗
QSBS-eligible industries experienced more firm births, more startup employment, and increased first-round VC
Method: Diff-in-diff comparing eligible vs ineligible industries after 2010 increase to 100%
States that decouple from QSBS lose the people and the revenue. Migration data doesn't lie.
33
Conform
6
Decoupled
2
Pending
2
Partial
8
No income tax
$102 billion
in AGI lost by California to outbound migration, 2020-2022
In 2022 alone, 24,670 high-earner households left, taking $16.1 billion in AGI.
Migration is driven by multiple factors (housing costs, remote work, overall tax burden) and QSBS conformity is one factor among many. But the pattern is clear: capital flows toward lower-tax, QSBS-conforming states.
Sources: CA Legislative Analyst's Office (2024), Center for Jobs (2024)
Migration data: IRS SOI Migration Data 2021-2022, Tax Foundation analysis Dec 2024
Nearly identical bills showed up in multiple states within months. Same data, same framing, same legislative session.
Dec 2024
DC passes B25-0900
Unanimous council vote to decouple from federal QSBS
Jan 2025
Oregon introduces SB 1507
QSBS decoupling bill using ITEP analysis and OCPP testimony
Jan 2025
Washington introduces SB 6229
Capital gains tax decoupling from QSBS exclusion
Feb 2025
New York includes decoupling in budget proposal
QSBS decoupling included as part of broader tax changes
Same playbook. Different states. Same session.
"Trump tax giveaway"
QSBS was signed by President Clinton in 1993, expanded to 100% exclusion by President Obama in 2010. Bipartisan policy, partisan framing.
Bundled revenue estimates
Revenue projections lump QSBS decoupling with unrelated tax changes, inflating the headline number.
If there are concerns about how QSBS is used at the top end, the response should be proportional. Not a blunt instrument that hits everyone.
Decoupling doesn't solve a problem. It creates new ones.
It doesn't raise meaningful revenue (people move). It doesn't target abuse (it hits everyone equally). And it removes one of the few incentives that actually works to encourage startup formation and risk-taking.
Reform, not repeal
If trust stacking and high-end exclusions are the concern, address those directly: cap individual lifetime QSBS exclusions at $10M per taxpayer across all entities, closing the trust stacking multiplication while preserving the benefit for typical founders and employees.
Data without distribution is just noise. Get this in front of decision-makers.
Most legislators voting on QSBS decoupling haven't seen the Treasury data. Send it to them.
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U.S. Treasury OTA Working Paper 127 ↗
January 2025. Primary source for all distribution, claimant, and exclusion data (2012-2022).
Study finding ~12% increase in startup investment after 100% QSBS exclusion. Uses within-firm funding round variation.
Chen & Farre-Mensa (2023/2025) ↗
Diff-in-diff study finding more firm births, startup employment, and first-round VC in QSBS-eligible industries.
IRS SOI Migration Data, 2021-2022 ↗
Interstate migration of tax filers and AGI. See also: Tax Foundation analysis (Dec 2024) ↗
California Legislative Analyst's Office (2024) ↗
Analysis of high-earner outmigration and AGI losses from California, 2020-2022.
Source of the "94% goes to millionaires" claim. State-by-state revenue estimates.
State legislation