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

Gifting QSBS: What the New York Times Got Wrong

Gifting QSBS is legal, and it is what Congress designed: §1202(h) expressly preserves QSBS character, holding-period tacking, and carryover basis when stock is transferred by a qualifying gift. A gift does not automatically create a fresh $15 million exclusion. The donee may have an applicable §1202 limitation only to the extent that donee recognizes eligible gain and has unused capacity under §1202(b)—often up to $15 million of eligible gain for post–July 4, 2025 stock, or $10 million for earlier acquisitions, subject to the 10× basis alternative and other rules. A late-2021 New York Times article framed the strategy as a dodge. The framing was wrong. Here is what the Times missed, and how founders do this correctly.

In December 2021, the New York Times published “A Lavish Tax Dodge for the Ultrawealthy Is Easily Multiplied,” an article about tax planning strategies used by wealthy entrepreneurs and investors. One section focused on "gifting" Qualified Small Business Stock (QSBS) as a way to multiply the $10 million capital gains exclusion — a strategy the article characterized as an aggressive "dodge" that wealthy founders use to avoid taxes.

The Times got this wrong. Not every aggressive-sounding strategy is a dodge, and this particular strategy is not only legal, it is exactly what Congress intended when it designed the QSBS exclusion.

Related: Gifts and transfers create new substantiation needs at the recipient level. For the building blocks of a defensible letter, see what your QSBS attestation letter needs to contain.

This post explains the QSBS stacking strategy in detail: how it works, why it is legal, what the New York Times misunderstood, and when it actually makes sense for a founder or investor to use.

What Is QSBS?

Under Section 1202, a non-corporate taxpayer can exclude capital gain from the sale of Qualified Small Business Stock (QSBS) if the corporation meets the size and asset tests and the stock is held long enough. Under §1202(b), the eligible gain a taxpayer may take into account from an issuer is limited to the greater of (1) the remaining applicable dollar limit after all applicable statutory reductions, or (2) 10 times the taxpayer’s adjusted basis in that issuer’s QSBS disposed of during the year (without regard to post-issuance basis increases). The dollar limit is generally $10 million or $15 million depending on acquisition date after tacking; the statute also coordinates certain same-year gains from older stock, and the $15 million starting amount is indexed for inflation for tax years after 2026. See §1202(b)(4)–(5). The exclusion percentage in §1202(a) then applies to that limited eligible gain. A gift does not guarantee a $15 million exclusion. Elsewhere below, “applicable §1202 limitation” means that per-taxpayer eligible-gain rule—not an automatic fresh $15 million for every donee. For stock acquired from September 28, 2010 through July 4, 2025, the 100% exclusion requires more than five years of holding. Earlier acquisitions generally carry 50% or 75% exclusions after more than five years, with special rules for certain older stock. For stock acquired after July 4, 2025, the exclusion is 50% at three years, 75% at four years, and 100% at five years or more. Apply holding-period tacking to determine the acquisition date and holding period; gifting legacy stock does not convert it into the newer regime. All percentages remain subject to the applicable §1202 limitation and other §1202 requirements.

This is an extraordinary benefit. For a founder who actually excludes $15 million of eligible gain, that exclusion saves about $3.57 million in federal tax — at the 23.8% long-term capital gains rate (20% plus the 3.8% net investment income tax), not the ordinary rate. A larger company sale price alone does not increase the savings from the same $15 million of excluded gain at the same rate. Larger federal savings require more excluded gain (for example through stacking or a higher applicable limitation), a different rate, or both. Company sale price, shareholder proceeds, taxable gain, the applicable §1202 limit, and actual excluded gain are different numbers.

But that cap is per person — and that is the key to everything that follows.

How gifting relates to QSBS stacking

Gifting is often discussed as part of QSBS stacking—using qualifying transfers so that gain properly taxable to separate eligible holders can use each holder’s available §1202 limitation. The fuller treatment of trusts, §643(f), and assignment of income belongs on that stacking guide. This article focuses on gift mechanics and the New York Times framing.

A separate taxpayer who recognizes eligible QSBS gain may have an applicable §1202 limitation under §1202(b). A gift does not automatically mint a new $15 million exclusion. If you gift shares to a non-grantor trust or to adult children, each recipient is generally a separate taxpayer, but results still depend on unused capacity, trust status, aggregation, and anti-abuse rules. Spouses are a special case: whether a married couple filing jointly has one $15 million limitation or two is unresolved. See Can Both Spouses Claim the QSBS Exclusion?.

A worked example: Suppose you and your spouse together found a company and each own 50 percent of the common stock. The company is acquired for $100 million. The company meets all QSBS requirements.

Without any planning:

• You own 50% and your spouse owns 50% — each of you has $50 million of gain.
• If the separate-taxpayer reading is correct, each of you applies your own $15 million limitation — $30 million between you. The remaining $70 million is taxed at 23.8% federally (the 20% long-term rate plus 3.8% NIIT), roughly $16.7 million, plus any state tax.
• Under the competing one-limitation reading, the two of you share a single $15 million limitation on your joint return. $15 million is excluded, $85 million is taxed, and the federal tax is roughly $20.2 million.
• Which reading is right is unresolved. Two spouses who each acquired their shares at original issuance have the strongest version of the two-limitation position — but it is a position, not settled law.

With QSBS stacking (via gifting during the company's life):

• Before the sale, you gift a slice of stock to an irrevocable trust for your children — adding a third QSBS holder.
• Now three taxpayers hold QSBS: you, your spouse, and the children's trust.
• The non-grantor trust is generally a separate taxpayer, so any applicable §1202 limitation at the trust level does not depend on the spousal question (capacity and anti-abuse rules still apply).
• On the two-limitation reading for spouses: $45 million excluded, $55 million taxed, roughly $13.1 million of federal tax — about $3.6 million less than without the trust.
• On the one-limitation reading: $30 million excluded ($15 million shared between you and your spouse, plus $15 million for the trust), $70 million taxed, roughly $16.7 million of federal tax.
• Either way, under these assumptions the trust can exclude $15 million of gain regardless of which interpretation applies to the spouses. This illustration assumes qualifying post–July 4, 2025 stock after tacking, the holding period for a 100% exclusion, sufficient eligible gain, a non-grantor trust taxed on that gain, and an unused dollar limitation; inflation adjustments are ignored.

That is the basic idea behind gifting in a stacking discussion: transfers that put shares in the hands of genuinely separate eligible taxpayers may allow more of the family’s eligible gain to use available §1202 limitations—subject to the caveats above and the fuller analysis in the QSBS stacking guide.

How Gifting QSBS Actually Works

The holding period "tacks." When you gift stock, the recipient takes your holding period for purposes of the applicable §1202 holding period. If you bought the stock 3 years ago and gift it to your spouse, your spouse is deemed to have held it for 3 years as well. This means you can gift shares at any point during the holding period — the recipient keeps accruing time after the gift, and the combined holding period (your time plus theirs) is what must satisfy the applicable §1202 holding period.

Basis generally carries over for gain. Under IRC §1015, a donee generally takes the donor’s adjusted basis for calculating gain, not necessarily the donor’s original cost. Special rules apply to losses when gift-date value is below basis, and qualifying gift tax paid can increase basis. For example, stock with $1 per share of adjusted basis and $10 per share of gift-date value is a gift worth $10 per share, with $9 of built-in gain. If the recipient later sells for $10 net per share, with no intervening basis adjustment, the gain is $9 per share before any available QSBS exclusion. A different sale price produces a different gain.

Qualifying property acquired from a decedent generally receives a basis adjustment under IRC §1014 to its applicable estate-tax valuation. That can be a step-down as well as a step-up. Exceptions include income in respect of a decedent and certain appreciated property gifted to the decedent within one year and returned to the donor or the donor’s spouse. A lifetime gift does not generally reset basis to gift-date fair market value, and the donor’s later death does not automatically reset the basis of previously gifted assets.

Gift taxes and the annual exclusion. For 2026, the annual exclusion is $19,000 per donor, per recipient, for qualifying present-interest gifts. Future-interest gifts, including some gifts in trust, do not qualify and can require Form 709 even below that amount. Electing gift splitting with a spouse also requires gift-tax reporting; do not assume that a gift below the annual exclusion eliminates every filing requirement.

Taxable gifts remaining after applicable exclusions and deductions generally use the donor’s available lifetime gift and estate tax exemption before generating gift tax. The basic exclusion amount is $15 million per individual in 2026 under the 2025 OBBBA, with inflation adjustments thereafter. Value the transferred shares and account for prior taxable gifts, remaining exemption, and any gift-splitting election before estimating tax or deciding what returns to file.

Gift timing matters. You must gift the shares before the acquisition or merger closes. If you wait until after the sale, you are gifting the cash proceeds, not the stock, and the strategy does not work. The IRS will argue that you are simply dividing the after-tax proceeds, not multiplying the QSBS exclusions. The holding period and basis-carryover benefits only apply to gifts of the actual stock.

Who Can You Gift To?

Your spouse. Gifting to your spouse is mechanically simple: Section 1041 makes the transfer nontaxable, and Section 1202(h) preserves the stock's QSBS character and the holding period in the donee spouse's hands. What the gift does not do by itself is create a second dollar limitation. If the separate-spouse interpretation is correct, spouses who each own post-July 4, 2025 QSBS could potentially have $30 million of combined dollar-limit exclusion. Under the competing one-cap interpretation, spouses filing jointly would share one $15 million limitation. Community-property characterization can change who owns the stock, but it does not answer the federal question. Gifts to non-grantor trusts and to adult children do not carry this uncertainty, which is why many planners lead with them. See Can Both Spouses Claim the QSBS Exclusion?

Your children directly. You can gift shares to adult children. Each child who is a separate taxpayer and recognizes eligible QSBS gain at exit may have an applicable §1202 limitation under §1202(b)—not an automatic fresh $15 million. Structure gifts to minor children carefully (fiduciary and Uniform Transfers to Minors Act (UTMA) considerations).

Trusts for your children. Many founders use irrevocable trusts to hold QSBS on behalf of their children. For a trust to be considered for a separate limitation, it generally must be a non-grantor trust that is taxed on the gain—and even then, creating the trust does not automatically create a separate $15 million exclusion (§643(f) aggregation and substance matter). A grantor trust can hold QSBS without breaking qualification, but it is disregarded for income tax purposes—its gain lands on your return and shares your cap. Work with a trusts-and-estates attorney; see the QSBS stacking guide for limits.

Charities and charitable vehicles.Donating QSBS to a charity doesn't let you use your §1202 exclusion — but not because of any special carve-out. A charitable gift isn't a taxable sale, so there is no gain for you to exclude in the first place; you take a charitable deduction instead, and the charity is tax-exempt. Donor-advised funds and charitable remainder trusts can serve both philanthropic and tax goals while you preserve the exclusion on the stock you keep.

What the New York Times Got Wrong

The New York Times article implied that QSBS gifting is an aggressive loophole — a clever exploit of the tax code by well-advised wealthy people that Congress never intended.

This is incorrect on both counts.

First, the strategy is not a loophole. Section 1202 applies its eligible-gain limitation on a per-taxpayer basis under §1202(b). The statute does not say “one exclusion per family” or “one exclusion per transaction.” That does not mean every recipient automatically receives a fresh $15 million exclusion—capacity, acquisition date, and anti-abuse rules still apply. Congress could have written an aggregate family limit. It did not. The one place this is genuinely unsettled is between spouses filing jointly, where the statute does not say whether the return carries one dollar limitation or two.

Second, Congress clearly intended for families to benefit from multiple exclusions. QSBS was designed to encourage investment in small businesses. Congress recognized that families invest together — spouses invest together, parents invest alongside their children, multigenerational family offices hold diversified portfolios of small business investments. If Congress wanted to limit the tax benefit to one person per family, it would have said so explicitly.

The Times conflated legal tax planning with tax avoidance. Optimizing the use of tax benefits that Congress explicitly granted is not a "dodge." It is prudent tax planning.

The Step Transaction Doctrine and Gifting Risks

That said, the strategy is not risk-free. The IRS has a powerful tool called the "step transaction doctrine," which allows it to recharacterize a series of separate transactions as a single transaction if the steps are coordinated to produce a tax result that would not be available from the individual steps alone.

In the context of QSBS gifting, the IRS might argue that the gift was not a genuine transfer of beneficial ownership, but rather a paper shuffle designed solely to multiply the exclusion, and therefore the step transaction doctrine should override the separate treatment of each person's exclusion.

This risk is low if:

• The gift is a genuine, arm's-length transfer. Your spouse or child actually becomes an owner, has voting rights (if the stock includes voting rights), and participates in major corporate decisions.
• Earlier planning helps, but no fixed waiting period guarantees protection. Review the negotiations, approvals, remaining conditions, and whether the right to sale proceeds had already become fixed.
• You document the gift properly. File gift tax returns (even if no tax is due), issue a stock certificate in the recipient's name, and update your corporate records.
• The transfer fits a genuine family wealth-transfer or estate plan, not a last-minute scramble before a known sale. (Don't try to recast a gift as “compensation” to a key employee to manufacture a business purpose — that turns it into taxable ordinary income to the recipient and forfeits the §1202(h) holding-period tacking and carryover basis the whole strategy depends on.)

The risk is higher if the gift occurs just weeks before a known exit, if the recipient is passive and has no actual involvement in the business, or if the entire arrangement appears to be a tax-engineering exercise with no substance.

Practical Example: The $50 Million Exit

Let's work through a detailed federal-only stacking illustration — with and without planning. Washington capital-gains figures are omitted here on purpose; see the short Washington note after the federal math.

Assumptions (federal illustration). Shareholder proceeds $50 million; combined basis $10,000; gain $49,990,000. Stock is treated as post–July 4, 2025 QSBS under the $15 million per-issuer starting amount — a fixed illustrative exclusion that disregards indexing for tax years after 2026. Post–July 4, 2025 stock cannot reach the five-year full-exclusion tier before July 2030; this example assumes the applicable holding period and other §1202 conditions are met at exit. No prior use of the issuer’s §1202 limitation. Federal rate: 20% long-term capital gains + 3.8% NIIT = 23.8%. Gifts are completed gifts; the children’s trust is a nongrantor trust and a separate federal taxpayer that may have an applicable per-issuer limitation if taxed on the gain (not automatic). About one-third of the stock each to the founder, the spouse, and the trust.

Scenario: No QSBS planning. All stock is in the founder’s name.

• Founders' cost basis: $10,000 combined (early-stage investment).
• Sale price / shareholder proceeds: $50 million.
• Total capital gains: $49,990,000.
• QSBS exclusion used: $15 million (fixed illustrative amount; indexing disregarded).
• Taxable gains: $34,990,000.
• Federal capital gains tax (20% + 3.8% NIIT): 23.8% × $34,990,000 = $8,327,620.
• (A California founder would fare far worse on state tax: California doesn't recognize the QSBS exclusion at all and would tax the full gain at up to 13.3%. That is a qualitative state-tax aside — not a Washington stack.)

Scenario: QSBS planning — gifts of roughly one-third of the stock to the spouse and one-third to a children’s nongrantor trust before exit.

• At exit, the founder, the spouse, and the children's trust each hold about $16.66 million of gain (one-third of $49,990,000).
• If spouses have separate limitations (unsettled): up to $45 million excluded ($15 million × three holders). Taxable gain about $4,990,000; federal tax at 23.8% = $1,187,620. Federal-only savings versus no-planning: $7,140,000.
• If spouses share one limitation (unsettled): $30 million excluded — one $15 million between the founder and spouse, plus $15 million for the trust. Taxable gain about $19,990,000; federal tax at 23.8% = $4,757,620. Federal-only savings versus no-planning: $3,570,000.
• (In California, none of these federal §1202 exclusions would apply at the state level — California would tax the gain in full.)
• The trust’s own $15 million federal exclusion accounts for the savings that do not depend on which spousal reading prevails. The two spousal readings are unsettled; do not treat a two-spousal-limit as settled law.

Washington capital gains — separate analysis required. Do not stack unsupported Washington capital-gains totals, combined federal+WA effective rates, or after-tax “savings” onto this federal illustration. Washington’s capital-gains excise tax requires a separate analysis of the spouses, the trust, whether gifts are complete or incomplete (incomplete-gift nongrantor treatment can pull gain to the grantor), and any beneficiary distributions of capital gain. Nongrantor trusts are not ordinary pass-throughs for this tax, and you should not assume every nongrantor trust is categorically Washington tax-free or that all trust gain is taxed to the family aggregate. See Washington Capital Gains Tax and Trust Planning and Washington Income Tax.

Note: This example assumes the children's trust is structured as a non-grantor trust — a separate taxpayer for federal income tax purposes that may have an applicable per-issuer limitation if taxed on the gain (subject to aggregation and anti-abuse rules). (A grantor trust would be disregarded, and its gain would fall back on the founder's own cap.) The two spousal figures reflect the two competing readings of Section 1202 on a joint return; neither is settled. It also assumes the founders meet the applicable §1202 holding period and all other QSBS conditions. Actual results will vary based on the founders' specific circumstances, state of residence, and the structure of the gifting.

When QSBS Gifting Makes Sense (and When It Doesn't)

QSBS gifting makes sense if:

• You have a realistic path to an exit in the next 3-7 years. The strategy requires advance planning; if there is no exit in sight, the complexity may not be worth it.
• Your expected gains will exceed $15 million per person. If you expect only $15 million and you're the sole shareholder, your own exclusion may already cover it — stacking is overkill.
• Your spouse is genuinely invested in the business or the family. Gifting to an uninvolved spouse, primarily to get an extra exclusion, carries elevated step transaction risk.
• You are in a high-tax jurisdiction (California, New York, Washington state with its capital gains tax). The tax savings from stacking can be substantial and may justify the planning complexity.
• You have time to implement before a right to sale income becomes fixed. Timing is facts-and-circumstances (assignment of income / step transaction)—there is no invented bright-line waiting period. Last-minute gifting is more vulnerable to challenge.

QSBS gifting may not make sense if:

• Your expected gains are at or under $15 million. A single exclusion may be enough, and the complexity of gifting and trust management may not justify it.
• The exit is imminent and you have not yet done the planning. Gifting weeks before a known sale creates legal risk.
• You have a difficult marriage or family situation. Gifting stock to a spouse or children and then having a divorce or family dispute can create operational and legal complications.
• Your business requires unanimous or near-unanimous shareholder consent for major decisions. Fragmenting ownership to multiple shareholders or trusts can complicate governance and create blocking minority problems.
• You are in a low-tax state (no state capital gains tax, and unlikely to move). The savings are smaller and may not justify the complexity.

Key Takeaways

QSBS gifting is a legal strategy for founders and investors with large exits when the statute’s requirements are met. The New York Times article mischaracterized qualifying gifts as a dodge. §1202(h) preserves character through qualifying gifts, and §1202(b) applies its limitation per taxpayer who recognizes eligible gain—subject to unused capacity, trust status, assignment of income, and anti-abuse rules. Families can sometimes benefit from multiple limitations; that is not the same as an automatic per-donee $15 million.

However, the strategy requires careful implementation. You need to:

• Make gifts of the actual stock before a fixed right to sale income arises; timing is facts-and-circumstances, not a safe-harbor waiting period.
• Ensure the gifts are genuine transfers of beneficial ownership, not paper shuffles.
• Document the gifts properly (gift tax returns, stock certificates, corporate records).
• Consider the holder's involvement in the business or the reasonableness of the gift from a family perspective.
• Work with a tax professional and an estate planning attorney to ensure the structure is sound.

If you are anticipating a QSBS exit and your expected gains exceed $15 million, it is worth exploring with your tax advisor whether QSBS stacking makes sense for your specific circumstances.

This post is for informational purposes only and does not constitute legal or tax advice. Consult with a qualified tax professional regarding your specific circumstances.

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Keep Reading

• QSBS & Section 1202: The Complete Founder's Guide
• Does QSBS Avoid Washington’s New 9.9% Income Tax? (Yes — For Now)
• QSBS Stacking: How to Multiply the $15M Exclusion with Trusts and Family Gifts
• Section 1045 Rollover: How to Defer QSBS Gains and Keep the Clock Running