Gifting QSBS: What the New York Times Got Wrong — and How Founders Can Do It Right

In late 2021, The New York Times ran a feature titled “A Lavish Tax Dodge for the Ultrawealthy Is Easily Multiplied.” It described how some Silicon Valley founders, including Roblox CEO David Baszucki, gifted shares of their companies to family members, effectively multiplying the Qualified Small Business Stock (QSBS) exclusion across several relatives. The article framed this as a clever trick of the rich — a way to “stack” $10 million exclusions and avoid millions in capital gains taxes. But what it didn’t mention is that this practice isn’t a loophole at all. It’s explicitly permitted by Congress under Section 1202(h) of the Internal Revenue Code.

Why QSBS Exists

Section 1202 was enacted in 1993 to encourage investment in true small businesses — companies with under $50 million in gross assets when the stock is issued. If you take real entrepreneurial risk by investing in or founding a small company and hold your shares for five years, you can exclude a significant portion of the gains when the company succeeds. This incentive has helped countless startups attract capital and keep founders invested for the long haul. It’s part of the ecosystem that built companies like Roblox, Airbnb, and Zoom — the very success stories critics point to when they call the law “too generous.”

Gifting and “Stacking” Are Built Into the Statute

Under § 1202(h), if you give your QSBS to another person or to a trust, that recipient “steps into your shoes.” They inherit your original holding period and eligibility. That means a founder who gifts stock before a liquidity event can legitimately allow multiple family members or trusts to claim separate $10 million exclusions. Far from being a tax dodge, gifting QSBS is a lawful way to support long long‑term family succession planning, diversify wealth before a liquidity event and encourage multiple stakeholders to participate in the startup’s growth.

Doing It Right: Timing, Documentation, and Intent

The key is to plan early and document everything. Gifts should occur while the company is still small and the stock relatively low in value — ideally years before an acquisition or IPO. Waiting until a transaction is on the horizon risks IRS scrutiny under “anticipatory assignment of income” rules. Founders should confirm their stock meets all QSBS eligibility tests (C c orp status, less than $50 million gross assets, active business test), maintain records of issuance, valuations, and any transfers, file proper gift‑tax returns, update the cap table and work with counsel to ensure gifts are completed well before any sale. Executed properly, the gifting of QSBS isn’t gaming the system — it’s precisely what Congress envisioned when it created a long‑term incentive to build and invest in American businesses.

Reframing the Narrative

The Times saw manipulation where many tax practitioners see foresight. Section 1202 isn’t perfect — like any incentive, it can be misused — but gifting stock to family or trusts that share in the entrepreneurial risk is entirely consistent with the statute’s purpose. Instead of being a “lavish dodge,” QSBS gifting can be viewed as rewarding founders for patience, vision, and early risk‑taking, and allowing them to pass that reward responsibly to the next generation.