How Is Unexcluded QSBS Gain Taxed? (w/Examples) + FAQs

This article reflects federal rules and California rules as of June 2026 and covers tax year 2025 (filed in 2026). Tax law changes — confirm current figures before you file.

Quick Answer

Unexcluded QSBS gain is taxed at a maximum federal rate of 28% for tax year 2025, not the usual 20% long-term capital gains rate. On top of that 28%, the 3.8% Net Investment Income Tax often applies, and for older stock a 7% slice of your excluded gain hits the Alternative Minimum Tax.

You sold qualified small business stock (QSBS), claimed your Section 1202 exclusion, and now you face a hard truth: the part of your gain that the exclusion did not cover is taxed under a special, higher rule. That leftover gain — the “unexcluded” or “taxable” portion — lands in the 28% rate group, which is steeper than the 15% or 20% rate most people expect on a stock sale, and the surprise can cost a seller tens of thousands of dollars at filing time.

This matters because the One Big Beautiful Bill Act (OBBBA), signed July 4, 2025, created brand-new ways to end up with unexcluded gain — partial 50% and 75% exclusions that did not exist for recent stock before. According to the Tax Adviser, any unexcluded gain on stock held three or four years under the new tiers is taxed at 28% rather than the 15% or 20% rates — a detail many sellers miss until it is too late.

💰 How the 28% maximum rate works on the taxable slice of your QSBS gain, with copy-the-math examples.
📊 When the 3.8% Net Investment Income Tax stacks on top, pushing your real rate to 31.8%.
⚠️ How the 7% AMT preference quietly taxes part of the gain you thought was fully excluded.
🆕 Why OBBBA’s new 50%/75% tiers create unexcluded gain that older 100% stock never produced.
🌎 Why California taxes 100% of your QSBS gain even when the IRS taxes almost none of it.

What “Unexcluded QSBS Gain” Actually Means

QSBS is stock in a qualifying small C corporation that, under Internal Revenue Code Section 1202, lets a non-corporate seller leave some or all of the gain off their tax return. The “excluded” gain is the part you keep tax-free. The “unexcluded” gain is everything else — the part that still gets taxed.

Unexcluded gain shows up in three common ways. First, your gain can exceed the per-company exclusion cap ($10 million for older stock, $15 million for post-OBBBA stock). Second, your stock may only qualify for a partial exclusion of 50% or 75% instead of 100%. Third, you may fail a requirement entirely, making all of the gain taxable as a normal sale.

The key point is that unexcluded QSBS gain does not follow normal capital gains rules. Because of a cross-reference inside Section 1(h), the taxable portion of Section 1202 gain falls into the 28% rate group. That means even a long-term seller pays up to 28% on this slice — higher than the 20% top long-term rate and far above the 15% bracket many sellers assume applies.

Why the rate is 28%, not 20%

When Congress wrote the QSBS rules, it paired a generous exclusion with a higher rate on whatever was left. The trade-off was simple: exclude a big chunk tax-free, but tax the remainder harder. The IRS Schedule D instructions route this leftover gain through the 28% Rate Gain Worksheet, which is the same worksheet used for collectibles.

The consequence is real money. On $1 million of unexcluded gain, the difference between 28% and 20% is $80,000 in extra federal tax. A seller who budgets for the 20% rate and gets hit with 28% faces a painful shortfall when the return is filed.

A common misconception is that holding the stock “long enough” drops the rate to 15% or 20%. It does not. The unexcluded portion stays in the 28% group no matter how long you held it.

The Three Layers That Tax Your Leftover Gain

Unexcluded QSBS gain can be hit by up to three separate charges. Understanding each one — and when it applies — is the difference between an accurate estimate and a costly surprise.

Layer 1 — The 28% federal income tax

The taxable portion of your Section 1202 gain is taxed at a maximum 28% rate for tax year 2025. If your ordinary marginal rate is below 28%, you pay that lower rate; the 28% is a ceiling, not a floor. Most QSBS sellers have large gains, so they hit the 28% cap.

The consequence of ignoring this is underpayment. If you set aside only 20% for taxes, you will owe more at filing plus possible underpayment penalties. The fix is to set aside 28% of the unexcluded slice, plus the surtax below.

Layer 2 — The 3.8% Net Investment Income Tax

The Net Investment Income Tax (NIIT) adds 3.8% on investment income for high earners (modified AGI above $250,000 for joint filers, $200,000 for single filers, for tax year 2025). Per QSBS Expert, the unexcluded portion of QSBS gain is subject to NIIT, so it stacks on top of the 28% rate.

That brings the combined federal rate on unexcluded gain to 31.8% for most sellers. Gain that is fully 100%-excluded is not subject to NIIT, but any taxable slice is. Plan for the full 31.8% on the unexcluded amount.

Layer 3 — The 7% AMT preference on excluded gain

Here is the trap that catches partial-exclusion sellers. For 50% and 75% exclusion stock, 7% of the excluded gain is added back as a preference item for the Alternative Minimum Tax (AMT), per QSBS Expert. So even the gain you thought was tax-free can generate a small AMT bill.

This preference applies to 50% and 75% stock, including the new OBBBA 50%/75% tiers. It does not apply to 100%-excluded stock acquired after September 27, 2010, and held five years. A seller who forgets this add-back can underestimate AMT and owe more than expected.

Which Situation Applies to You?

The taxation of your leftover gain depends entirely on when your stock was issued and how long you held it. Find your situation below, then read the matching example.

Stock issued on or before July 4, 2025, held 5+ years, 100% exclusion: You only have unexcluded gain if you bust the $10 million / 10x-basis cap. The over-cap amount is taxed at 28% + 3.8% NIIT. No 7% AMT preference applies.
Stock issued before Feb. 18, 2009 (50%) or between Feb. 18, 2009 and Sept. 27, 2010 (75%): Half or a quarter of your gain is unexcluded, taxed at 28% + 3.8% NIIT, plus the 7% AMT preference on the excluded part.
Stock issued after July 4, 2025, held 3 years (50%) or 4 years (75%): New OBBBA tiers. The unexcluded 50% or 25% is taxed at 28% + 3.8% NIIT, plus the 7% AMT preference.
Stock issued after July 4, 2025, held 5+ years: 100% exclusion up to $15 million; unexcluded gain only arises above the cap.
Stock that fails a Section 1202 test: No exclusion. The entire gain is taxed as a normal capital gain (15%/20% + NIIT), not at 28%.

Old Rules vs. New OBBBA Rules

The OBBBA, effective for stock issued after July 4, 2025, created a tiered system. Stock issued on or before that date keeps the legacy rules. The date of issuance controls — not the date you sell, per Vide Law.

Feature	Stock issued on/before July 4, 2025
Exclusion cap	$10 million or 10x basis, greater of
Gross-asset limit	$50 million
Holding period	5 years, all-or-nothing
Partial exclusions	Only legacy 50%/75% pre-2010 stock

Feature	Stock issued after July 4, 2025
Exclusion cap	$15 million or 10x basis, indexed from 2027
Gross-asset limit	$75 million
Holding period	Tiered: 3 yrs = 50%, 4 yrs = 75%, 5+ yrs = 100%
Partial exclusions	New 50% (3-yr) and 75% (4-yr) tiers

The new $15 million cap and $75 million asset limit are confirmed by Grant Thornton, which also notes the cap is indexed for inflation in years after 2026. The tiered holding period is the biggest source of new unexcluded gain, because selling at year 3 or 4 leaves 50% or 25% of the gain taxable at 28%.

The important effective-date and sunset note: these QSBS changes are permanent, not a temporary OBBBA provision that sunsets after 2028. That makes the planning durable — but the figures still index, so confirm the cap each year.

Worked Examples (Copy the Math)

Below are four fully worked examples for tax year 2025. Each shows the unexcluded gain, the 28% tax, the 3.8% NIIT, and the 7% AMT preference where it applies.

Example 1 — Maria: 100% stock over the $10M cap

Maria bought QSBS in 2018 (legacy 100% stock) with a $50,000 basis and sells in 2025 for $13 million. Her gain is $12,950,000. Her cap is the greater of $10 million or 10x basis ($500,000), so $10 million is excluded.

Unexcluded gain: $12,950,000 − $10,000,000 = $2,950,000.
28% federal tax: $2,950,000 × 28% = $826,000.
3.8% NIIT: $2,950,000 × 3.8% = $112,100.
AMT preference: none (100% stock gets no 7% add-back).
Total federal: $938,100 on the leftover gain.

Example 2 — David: legacy 75% exclusion stock

David bought QSBS in 2010 (75% exclusion tier) with a $200,000 basis, sells in 2025, and has a $4 million gain, under his cap.

Excluded (75%): $3,000,000. Unexcluded (25%): $1,000,000.
28% federal tax: $1,000,000 × 28% = $280,000.
3.8% NIIT: $1,000,000 × 3.8% = $38,000.
7% AMT preference: $3,000,000 × 7% = $210,000 of preference income, taxed in AMT at 28% ≈ $58,800 potential AMT impact.
Combined federal exposure: roughly $376,800.

Example 3 — Aisha: new OBBBA 50% tier, sold at year 3

Aisha bought QSBS in August 2025 (post-OBBBA) and sells after exactly 3 years for a $6 million gain. She qualifies for the new 50% tier.

Excluded (50%): $3,000,000. Unexcluded (50%): $3,000,000.
28% federal tax: $3,000,000 × 28% = $840,000.
3.8% NIIT: $3,000,000 × 3.8% = $114,000.
7% AMT preference: $3,000,000 × 7% = $210,000 preference, ≈ $58,800 AMT impact.
Combined federal exposure: roughly $1,012,800. Waiting to year 5 would have excluded the entire $6 million.

Example 4 — Tom: small partial gain, the 31.8% reality

Tom has $100,000 of gain on 50% exclusion stock. $50,000 is unexcluded. He pays $50,000 × 28% = $14,000 plus $50,000 × 3.8% = $1,900, for $15,900 — the combined 31.8% rate, matching the QSBS Expert illustration. He also adds back 7% of the $50,000 excluded ($3,500) for AMT.

Three Scenarios at a Glance

These tables map the most common fact patterns to their tax result for tax year 2025.

Selling Situation	Federal Tax Result
Legacy 100% stock, gain under the $10M cap	$0 federal tax on the excluded gain; nothing taxed at 28%
Legacy 100% stock, gain over the $10M cap	Over-cap amount taxed at 28% + 3.8% NIIT; no AMT add-back
Stock fails a Section 1202 test	Entire gain taxed at normal 15%/20% + 3.8% NIIT, not 28%

Holding Period (Post-OBBBA Stock)	Taxable Portion
Under 3 years	100% of gain taxable; no QSBS exclusion at all
Exactly 3 years	50% unexcluded, taxed at 28% + NIIT + 7% AMT add-back
Exactly 4 years	25% unexcluded, taxed at 28% + NIIT + 7% AMT add-back

Extra Tax Layer	When It Applies
3.8% NIIT	High earners on any unexcluded QSBS gain
7% AMT preference	50% and 75% exclusion stock, on the excluded portion

How to Report It: Forms and Steps

QSBS sales run through the standard capital gains machinery, then get adjusted. You report the sale on Form 8949, carry it to Schedule D, and use a code to back out the excluded amount. Our guide on filling out Form 8949 and Schedule D walks through each box.

The steps are: (1) report the full sale on Form 8949 with proceeds and basis; (2) enter exclusion code Q in column (f) and the excluded gain as a negative adjustment in column (g); (3) carry the net to Schedule D; (4) run the 28% Rate Gain Worksheet in the Schedule D instructions so the unexcluded slice is taxed at 28%; and (5) complete Form 6251 for the 7% AMT preference if you hold 50% or 75% stock.

The consequence of a reporting mistake is steep. Omit code Q and you may tax the whole gain; skip the 28% worksheet and software may wrongly apply 20%, triggering an IRS notice. The deadline is your normal return date — April 15, 2026 for tax year 2025, or October 15 with an extension.

Does California Tax Unexcluded QSBS Gain?

Federal rules are only half the story. California does not conform to Section 1202 at all and taxes 100% of your QSBS gain — excluded and unexcluded alike — as ordinary income, per the Franchise Tax Board. California repealed its own QSBS exclusion years ago and never adopted the federal version.

The consequence is large for California sellers. A founder who excludes $10 million federally still owes California tax on the full gain at rates up to 13.3% for tax year 2025. On a $10 million “federally excluded” gain, that is roughly $1.33 million of California tax the seller may not expect.

State conformity varies widely. Some states fully follow federal QSBS rules, some partially conform, and a handful (like California and New Jersey) do not conform. Always check your own state agency before assuming the federal exclusion carries over.

Mistakes to Avoid

Assuming the 20% rate applies. The unexcluded slice is taxed at 28%, costing 8 extra points and often a four- or five-figure surprise.
Forgetting the 3.8% NIIT. Leaving it out understates your bill by 3.8% of the entire unexcluded gain.
Ignoring the 7% AMT preference. On 50%/75% stock, this quietly taxes part of your “excluded” gain and can trigger AMT you did not plan for.
Selling post-OBBBA stock at year 3 or 4. You lock in 50% or 25% of taxable gain at 28% instead of waiting for the 100% exclusion at year 5.
Mixing up issuance date and sale date. New OBBBA rules apply by issuance date; selling in 2026 does not move pre-July-2025 stock into the new tiers.
Skipping exclusion code Q on Form 8949. Without it, the IRS may tax your full gain and send a notice.
Assuming your state follows federal. California taxes the full gain; relying on the federal exclusion can leave a six-figure state bill unpaid.

Do’s and Don’ts

Do set aside about 31.8% of any unexcluded gain (28% + NIIT) for federal tax. Why: it prevents an underpayment shortfall and penalties.
Do run the 28% Rate Gain Worksheet or confirm your software did. Why: it is the only way the correct rate gets applied.
Do keep your stock-issuance and acquisition dates documented. Why: they decide which exclusion tier and cap apply.
Do check your state’s conformity early. Why: a non-conforming state like California can owe far more than the federal bill.
Do model a year-5 sale for post-OBBBA stock. Why: waiting can convert a 50%/75% taxable result into a 100% exclusion.
Don’t assume 100% stock ever triggers the 7% AMT add-back. Why: it only applies to 50%/75% stock, and over-correcting overstates tax.
Don’t forget the per-issuer cap. Why: gain above $10M/$15M is fully taxable at 28% even on great stock.
Don’t treat a failed QSBS sale as 28% gain. Why: a disqualified sale is normal 15%/20% gain, and 28% would overpay.

Pros and Cons of the QSBS Tax Treatment

Pro — Huge exclusion. Up to $10M or $15M tax-free is among the richest breaks in the code. Why it matters: it can erase most of a founder’s tax.
Pro — Faster access under OBBBA. Partial exclusions at 3 and 4 years add flexibility. Why: you no longer must wait a full 5 years for any benefit.
Pro — NIIT-free on 100% gain. Fully excluded gain dodges the 3.8% surtax. Why: it boosts the after-tax value of a clean 100% exclusion.
Pro — Stacking. Trusts can multiply the cap. Why: the $15M cap per bucket shelters far more, per Vide Law.
Pro — Permanent rules. The OBBBA changes do not sunset. Why: planning built around them is durable.
Con — 28% rate on leftovers. The unexcluded slice is taxed harder than normal gain. Why: it raises the cost of any over-cap or partial gain.
Con — AMT trap. The 7% preference surprises partial-exclusion sellers. Why: it taxes gain you believed was free.
Con — State non-conformity. California taxes the full gain. Why: it can wipe out much of the federal savings.
Con — Complex reporting. Codes, worksheets, and Form 6251 invite errors. Why: mistakes trigger IRS notices.
Con — Cap busts are fully taxable. Above the cap, there is no relief. Why: very large exits still face real tax.

What to Do Next

Pull your stock records and confirm the issuance date — this fixes your exclusion tier, cap, and asset limit.
Calculate your eligible gain and subtract the cap ($10M legacy or $15M post-OBBBA) to find your unexcluded amount.
Apply 28% + 3.8% NIIT to that unexcluded amount, and add the 7% AMT preference if your stock is 50% or 75% tier.
Check your state conformity — if you are in California, budget up to 13.3% on the full gain.
File Form 8949 with code Q, Schedule D with the 28% worksheet, and Form 6251 by April 15, 2026.
Call a CPA or tax attorney if your gain exceeds the cap, spans multiple tiers, involves trusts/stacking, or crosses state lines — expect roughly $1,500–$10,000+ for complex QSBS planning. This article is educational and not a substitute for advice on your specific situation.

FAQs

What rate is unexcluded QSBS gain taxed at? A maximum of 28% for tax year 2025, plus the 3.8% NIIT for high earners, bringing the combined federal rate to about 31.8% on the taxable portion.

Is unexcluded QSBS gain subject to the 3.8% NIIT? Yes. The unexcluded portion of QSBS gain is investment income and is subject to the 3.8% Net Investment Income Tax once your modified AGI crosses the threshold ($250,000 joint, $200,000 single, for 2025).

Does 100% excluded QSBS gain trigger AMT? No. Stock acquired after September 27, 2010, and held five years for the 100% exclusion has no 7% AMT preference. Only 50% and 75% exclusion stock triggers the AMT add-back.

How much QSBS gain can I exclude in 2025? The greater of $10 million or 10x basis for stock issued on or before July 4, 2025, and $15 million or 10x basis for stock issued after that date, per the new OBBBA cap.

Why is my QSBS rate 28% and not 20%? Because of Section 1(h). The taxable portion of Section 1202 gain falls into the 28% rate group, the same group as collectibles, regardless of how long you held the stock.

What happens if I sell post-OBBBA QSBS at year 3? You exclude only 50%. The other 50% is unexcluded and taxed at 28% + 3.8% NIIT, plus a 7% AMT preference on the excluded half. Waiting to year 5 would exclude 100%.

Does California tax my excluded QSBS gain? Yes. California does not conform to Section 1202 and taxes 100% of QSBS gain as ordinary income, at rates up to 13.3% for tax year 2025.

How is gain above the QSBS cap taxed? At 28% plus 3.8% NIIT. Any gain over the $10M or $15M per-issuer cap is fully unexcluded and taxed in the 28% rate group, with no AMT preference on 100% stock.

Which form reports the QSBS exclusion? Form 8949 and Schedule D. Enter exclusion code Q in column (f) of Form 8949, show the excluded gain as a negative adjustment, and run the 28% Rate Gain Worksheet.

Did the OBBBA QSBS changes expire after 2028? No. The QSBS changes under the OBBBA are permanent, not a temporary sunset provision, though the dollar caps are indexed for inflation starting in 2027.

Is unexcluded gain on disqualified QSBS taxed at 28%? No. If the stock fails a Section 1202 test, there is no QSBS treatment at all, so the gain is taxed at normal 15%/20% long-term rates plus NIIT, not 28%.

Do I owe AMT on the 75% exclusion tier? Possibly. The 7% AMT preference applies to 75% (and 50%) exclusion stock. Seven percent of the excluded gain is added to AMT income, which can create a small AMT liability.

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