The Section 1202 Gain Exclusion: How Much You Can Exclude and How to Report It

Two important phrases in this table are “at least” and “up to.” The dates of these acquisitions are crucial, and the percentage of the exclusion does not override the other eligibility rules or the gain limitations.

$15 million is not always the limit

The newer rules give you the greater of two calculations:

• The applicable dollar limit, which starts at $15 million for qualifying stock acquired after July 4, 2025.
• 10 times your aggregate adjusted basis in qualifying stock issued by that corporation and disposed of during the taxable year.

For example, suppose you acquired qualifying shares for $2 million and later sell them after holding them for at least five years. Ten times your basis equals $20 million. In that case, the 10-times-basis test produces the larger limitation, so the potential eligible gain limit can exceed $15 million.

The calculation gets more complicated when you have multiple issuances or prior sales from the same company. The statute contains rules that reduce the applicable dollar limit for eligible gain already taken into account in prior years.

A worked example

Suppose you acquired post-July 4, 2025 QSBS for $1.5 million. Five years later, you sell it for $13.5 million.

The greater of $15 million (the fixed limit) and $15 million (your 10-times basis limit) is, of course, $15 million. This means your $12 million gain falls below the per-issuer limitation. Because you held the shares for at least five years, the applicable exclusion percentage is 100%. In summary:

• Potential Section 1202 exclusion: $12 million

• Gain remaining after the Section 1202 exclusion: $0

This example keeps the math simple. Note that a larger gain, lower basis, earlier sale, or previous exclusion from the same company could produce a different result.

What Tax Applies to the Gain You Can't Exclude?

A Section 1202 gain exclusion does not necessarily remove the entire gain from the tax calculation. For qualifying stock with a partial exclusion, the IRS places the relevant gain into the 28% Rate Gain Worksheet, which can produce an effective federal rate of 14% for a 50% exclusion or 7% for a 75% exclusion before other taxes and adjustments.

This part can sound confusing because “28% rate gain” does not mean you simply take the taxable remainder and multiply it by 28%. The IRS's worksheet accounts for the Section 1202 exclusion when it calculates the tax on this category of long-term gain. Essentially:

• 50% exclusion = 14% federal rate on the original gain.
• 75% exclusion = 7%.
• A 100% exclusion leaves no gain from that transaction in the calculation

Other income can change your actual tax result, so treat those percentages as a way to understand the Section 1202 mechanics rather than as a quote of your final tax bill.

What about the 3.8% NIIT?

The Net Investment Income Tax (NIIT) can add another 3.8% tax for taxpayers who meet its requirements. The IRS says that gain excluded from gross income under Section 1202 is not subject to NIIT. Gain that remains taxable can potentially enter the NIIT calculation, depending on your income and circumstances.

What about AMT?

This is an area where older QSBS articles can create unnecessary confusion.

The IRS's 2025 Form 6251 instructions say the 7% alternative minimum tax preference applies to Section 1202 gain involving stock acquired before September 28, 2010 and held for more than five years. The 2025 law also removed the statutory AMT preference provision from Section 1202 for the newer rules.

So the blanket statement that “you add 7% of your QSBS exclusion to AMT for any partial exclusion” is not accurate. For post-July 4, 2025 stock, do not automatically apply the old 7% calculation.

How to Report the Section 1202 Gain Exclusion on Your Tax Return

For a direct stock sale, the IRS generally has you report the transaction on Form 8949, Part II, as a long-term transaction, then identify the Section 1202 exclusion with code “Q” and enter the excluded amount as a negative adjustment in column (g). Schedule D uses that adjusted result to calculate your taxable capital gain.

Here is the practical walkthrough for a direct sale reported on an individual return:

1. Start with Form 8949, Part II

Report the sale as you normally would, including the issuer, acquisition date, sale date, proceeds, and basis. Then make the Section 1202 adjustment:

Column (f): enter code Q
Column (g): enter the excluded gain as a negative number

The IRS specifically instructs taxpayers to report the sale as they would without the exclusion, then use code Q and a negative adjustment for the excluded gain. You should complete the other applicable columns as well.

Note: Do not enter the exclusion as a positive number. The negative adjustment tells the return that the excluded amount should come out of the taxable gain.

2. Move the result to Schedule D

Form 8949 feeds into Schedule D, where your overall capital gains and losses get combined. The Section 1202 transaction still appears in the capital-gain reporting flow even when the exclusion removes all of the eligible gain from federal taxable income. The IRS specifically directs taxpayers to complete Form 8949 before completing the relevant Schedule D lines.

If you have a partial exclusion, the remaining gain continues through the Schedule D calculation.

3. Complete the 28% Rate Gain Worksheet when required

If your return includes a Section 1202 exclusion, Schedule D's instructions direct you to the 28% Rate Gain Worksheet when the applicable conditions are met.

For a 50% exclusion, the worksheet includes the full excluded amount as a positive entry
For a 75% exclusion, it includes one-third of the excluded amount
For a 100% exclusion, the IRS instructions say not to make an entry for that exclusion

That may seem backwards at first. The worksheet uses those adjustments to calculate the correct tax treatment for the special category of gain. It is not asking you to put the excluded gain back into ordinary taxable income.

4. Check whether another form feeds the transaction into your return

Not every taxpayer receives the sale information on a 1099-B. The IRS provides separate instructions for Section 1202 gain reported through Form 1099-DIV, box 2c, and Form 2439, box 1c. In those cases, you still use Form 8949 to identify the issuer and apply the Section 1202 adjustment.

This is one reason you should not assume that your brokerage statement tells the whole story. Private-company exits often require supporting documentation that does not look like a standard public-stock transaction.

How to Report the Section 1202 Exclusion in TurboTax and Other Software

Tax software generally lets you enter the transaction as a stock sale and identify it as qualified small business stock. TurboTax's current guidance directs users through its investment-sale workflow and provides a Section 1202 option. Professional software can also generate Form 8949 code Q and the negative exclusion adjustment. Always verify your numbers before filing.

TurboTax currently walks users through the investment-sale section, where they enter the sale details and identify the transaction as qualifying small business stock. Professional tax software follows the same basic reporting structure.

The important catch is that software does not establish that your shares qualify for Section 1202.

Essentially, it can apply a calculation based on the information you provide, but it cannot independently determine whether:

• the company satisfied every requirement years ago
• your acquisition qualifies
• the correct acquisition date applies
• a prior sale from the same issuer reduced your available limitation

The new three-year, four-year, and five-year tiers make the acquisition date especially important for future returns. The software needs the right information to apply the right rule. So if you use TurboTax, TaxAct, or professional tax software, treat the generated forms as something to review, not as proof that the Section 1202 calculation is correct. A human review conducted by an experienced and trusted professional is your easiest route to a successful filing.

Special Situations: K-1s, Installment Sales, and Section 1045

QSBS reporting gets more involved when the stock sits inside a pass-through, the buyer pays you over multiple tax years, or you use a Section 1045 rollover. Partnerships and S corporations provide supporting information through Schedule K-1, installment sales generally use Form 6252, and Section 1045 can defer qualifying gain when you reinvest in replacement QSBS within 60 days.

QSBS reported on a K-1

If a partnership sells qualifying stock, it can report the transaction to its partners through Schedule K-1, box 11, code O. The IRS says the partnership should provide information about the issuing corporation, the partner's share of basis and sales price, and the dates the stock was bought and sold.The partner then uses that information to determine the allowable Section 1202 exclusion on the individual return.

The same general idea applies to S corporation reporting, although the exact K-1 codes and supporting information differ.

Installment sales

If you receive payments after the year of sale, an installment sale can change the timing of the gain and the exclusion. The IRS generally directs taxpayers to use Form 6252 for an installment sale. For QSBS, the allowable Section 1202 exclusion for a particular year gets allocated based on the eligible gain recognized in that year.

That means you should not simply claim the entire exclusion in year one if the transaction recognizes the gain over multiple years.

Section 1045 rollovers

Section 1045 offers a separate strategy when you sell qualifying small business stock before reaching the holding period needed for the Section 1202 exclusion. There are several detailed requirements in this situation, which is why we’ve broken them down in our guide to the QSBS Holding Period.

Common Section 1202 Reporting Mistakes

Most Section 1202 reporting problems come from treating the exclusion like a normal stock-sale adjustment. The IRS requires specific reporting on Form 8949, and the calculation can also involve the 28% Rate Gain Worksheet, K-1 information, or installment-sale rules. Small input errors can change the amount of gain you report.

Let’s lay out some common mistakes and their better alternatives to filing: