The gap, named · our reading of the rule

Most people who hold startup stock believe one of two things: that tax on an exit is unavoidable, or that the exclusion is automatic and applies itself when they sell. Our reading of § 1202 is that neither is true. It is a compliance status the company either maintained from the date of issuance or did not, and a single mistimed buyback, an entity that was never converted, or a sector on the excluded list can end it retroactively for everyone in that issuance. The gap is not knowledge of the benefit. It is evidence that the conditions were met on a date that has already passed.

What the statute sets out

IRC § 1202 allows non-corporate shareholders — individuals, trusts, and look-through owners of pass-through entities — to exclude federal capital gain on the sale of qualifying stock in a domestic C-corporation. The July 2025 amendments changed the caps and, for stock acquired after that date, introduced partial exclusions before the fifth year.

• Excluded sectors. § 1202(e)(3) excludes services in health, law, engineering, architecture, accounting, actuarial science, performing arts, consulting, athletics, financial and brokerage services, and any business whose main asset is its people's reputation or skill; banking, insurance, financing, leasing and investing; farming; certain oil, gas and mining; and hotels, motels and restaurants. Software, hardware, biotech product development and e-commerce generally sit inside the definition.
• States do not have to follow. Federal treatment says nothing about state treatment. Our reading, checked August 2026, and a question for your CPA: California, Pennsylvania and Mississippi decouple from § 1202 entirely and tax the gain at ordinary state rates, and states differ on whether they follow the 2025 changes. For a California resident that is the difference between a headline of nothing owed and a real bill.
• § 1045 exists for the early exit. Where stock held more than six months is sold before the holding period is met, § 1045 permits the gain to be rolled into replacement qualifying stock within the 60-day period beginning on the date of sale. Treat it as a deadline: miss the window and the relief is simply gone.

How entrepreneurs prepare for this conversation

• Keep the evidence from the day of issuance. Balance sheets, 409A valuations and bank statements showing gross assets sat under the cap at and immediately after your shares were issued. This is the document nobody can reconstruct years later.
• Know your redemption history. Significant buybacks from shareholders in the window around an issuance can taint it. You do not need to judge whether yours qualifies — you need the dates and amounts in front of the person who can.
• Treat a conversion date as a start line. If you began as an LLC, the holding clock runs from the conversion, and fair market value at that date sets the basis. Converting before appreciation rather than after changes the arithmetic materially.
• Write down your own state. Your tax residency is a fact about you, not about the company, and it decides whether the federal result is the whole result.

What to ask your attorney and CPA

1. Do our charter and share issuance records establish original issuance under § 1202, and what is missing from the file?
2. Has the company redeemed stock in a window that could taint my issuance?
3. Given my personal tax residency, does my state conform to § 1202 — and what does the after-tax number actually look like?
4. If I sell before the holding period is met, is a § 1045 rollover realistic on my timeline?

What this is not This piece quotes the published rule and says plainly where we are reading it rather than quoting it. It is not legal, tax or immigration advice, it creates no attorney–client relationship, and neither you nor we can apply it to your facts. Rules also move — check the date above, then take the questions in this piece to your own licensed attorney and CPA, who are the only people who can advise you.

Sources · primary law first, our own notes labelled as such

26 U.S. Code § 1202: partial exclusion for gain on qualified small business stock, as amended by Pub. L. 119-21. Read 3 October 2026.

26 U.S. Code § 1202(e)(3): excluded trades and businesses. Read 3 October 2026.

26 U.S. Code § 1045: rollover of gain from qualified small business stock. Read 3 October 2026.

Own Yourself Now reading of the July 2025 amendments, checked 3 October 2026 against 26 U.S.C. 1202 as amended. The state line above was checked in August 2026 and is a question for your CPA.

Ownership and work authorisation are treated differently in the rules, and that difference is what this library is about. Everything here is written for people keeping the job that holds their status.

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