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

By Joe Wallin | April 2026

In 2024, the New York Times published 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.

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 of the tax code, a U.S. citizen or resident can exclude up to $10 million in capital gains from the sale of Qualified Small Business Stock (QSBS). If your shares have been held for more than 5 years, and the corporation meets the size and asset tests, you can pay zero federal tax on up to $10 million in gains.

This is an extraordinary benefit. For a founder whose company sells for $50 million, the $10 million exclusion could save $3.7 million in federal income tax (at the top 37% rate). For a founder with a $100 million exit, the savings are even more dramatic.

But the rule was written with a limit in mind: $10 million per person.

The Basic QSBS Stacking Strategy

Here is where people get confused. Each person who holds QSBS gets their own $10 million exclusion. If you gift shares to your spouse, your spouse has a separate $10 million exclusion. If you gift shares to a trust for your children, or to your children directly, each beneficiary has their own $10 million exclusion.

This is not a "trick." It is simply how the tax code works.

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 have $50 million in gains.
• You can exclude $10 million using your Section 1202 exclusion.
• The remaining $40 million is subject to federal capital gains tax (20% federal rate, plus 3.8% net investment income tax, plus state tax).
• Your spouse is in the same position: $10 million excluded, $40 million taxed.
• Total capital gains tax: roughly $42 million on $100 million in gains (42% effective rate).

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

• You gift some of your shares to your spouse before the acquisition.
• Now your spouse owns more stock — let's say 60 percent, and you own 40 percent.
• At exit, your spouse has $60 million in gains, and you have $40 million.
• Your spouse can exclude $10 million. The remaining $50 million is taxed.
• You can exclude $10 million. The remaining $30 million is taxed.
• Total gains excluded: $20 million (instead of $10 million).
• Total capital gains tax: roughly $38 million on $100 million in gains (38% effective rate).
• Tax savings: approximately $4 million.

That is the basic idea. By gifting shares to your spouse (or creating trusts for your children, or gifting to adult children directly), you multiply the number of people who can use the $10 million exclusion, reducing your family's total tax bill on the exit.

How Gifting QSBS Actually Works

The holding period "tacks." When you gift stock, the recipient takes your holding period for purposes of the 5-year QSBS holding requirement. 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, and the recipient's holding period will still count toward the 5-year requirement — as long as you ultimately hold the stock for 5 years total.

Basis carries over. When you gift stock, the recipient takes a carryover basis (your original cost basis), not a step-up in basis. This is important because basis is how you calculate your gain. If you bought stock for $1 per share and it is worth $10 per share when you gift it, the recipient's basis is still $1, even though they received a gift worth $9 per share. When they sell, their gain is $9 per share, not $10.

This is different from what happens at death, where heirs receive a step-up in basis to fair market value on the date of death. A gift during your lifetime does not give the recipient a step-up.

Gift taxes and the annual exclusion. Gifts of stock are subject to federal gift taxes unless they fall within the annual exclusion. As of 2026, you can gift up to $18,000 per year to any person without filing a gift tax return or using any of your lifetime exemption. Your spouse can do the same.

If you gift more than $18,000 per year (or $36,000 if your spouse consents to split the gift), the excess uses your lifetime gift and estate tax exemption. As of 2026, your lifetime exemption is approximately $13 million (adjusted annually). For most wealthy founders planning around a QSBS exit, the lifetime exemption is more than sufficient, and gift taxes are not a concern.

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 straightforward. Your spouse becomes a holder of QSBS and is entitled to their own $10 million exclusion. If you and your spouse each hold stock, you can each use a separate exclusion at exit.

Your children directly. You can gift shares to adult children. Each child who holds QSBS at the time of exit gets their own $10 million exclusion. However, you need to be careful about how you structure gifts to minor children — there are 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. A properly structured grantor trust (where you retain certain powers for income tax purposes) can hold QSBS and allow multiple beneficiaries to benefit from the exclusion. However, trust structures are complex, and you need to work closely with a trusts-and-estates attorney to ensure the trust is structured correctly and that the QSBS benefit flows to the beneficiaries as intended.

Charities and charitable vehicles. Section 1202(b) explicitly excludes charitable contributions from the QSBS benefit — meaning if you gift to a charity, you do not get the exclusion. This is by design (Congress did not want the QSBS benefit flowing to charities). However, you can use donor-advised funds or charitable remainder trusts to achieve both philanthropic and tax goals while preserving the exclusion on other portions of your stock.

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 explicitly grants the exclusion to each person separately. The statute does not say "one $10 million exclusion per family" or "one $10 million exclusion per transaction." It says each person who holds QSBS gets the exclusion. Congress could have written the rule to prevent stacking (e.g., "the aggregate exclusion per family may not exceed $10 million"). Congress did not.

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.
• The gift is made well in advance of the exit. If you gift shares 6-12 months (or longer) before a sale, it is clear the gift was not timed to the exit.
• 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.
• There is a genuine business reason for the restructuring. If the recipient is a key employee or business advisor, the gift can be framed as an incentive compensation or profit-sharing arrangement.

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 example showing the math with and without stacking.

Scenario: A founder and spouse jointly build a software company. They do not actively do any QSBS planning.

• Founders' cost basis: $10,000 combined (early-stage investment).
• Sale price: $50 million.
• Total capital gains: $49,990,000.
• QSBS exclusions available: $10 million for the founder (if all stock is in the founder's name).
• Taxable gains: $39,990,000.
• Federal capital gains tax (20% federal + 3.8% NIIT): 23.8% = $9,517,620.
• Washington capital gains tax (tiered: 7% above the $250,000 standard deduction up to $1M, 9.9% above $1M): approximately $3.9M under the current rate structure.
• California state tax (if applicable): 13.3% = ~$5,318,830.
• Total tax (federal + state): approximately $18.3 million on a $50 million exit (36.6% effective rate).
• After-tax proceeds: ~$31.7 million.

Scenario: The same exit, but the founders engaged in QSBS planning, gifting shares to a spouse and a trust for children before the exit.

• Before the exit, the founder gifted approximately 25% of the stock to the spouse and another 25% to a trust for the children (holding 50% in their own name).
• At exit, the allocation is: Founder 50% ($25M), Spouse 25% ($12.5M), Trust/Children 25% ($12.5M).
• QSBS exclusions: Founder $10M, Spouse $10M, Children (via trust) $10M = $30M total.
• Taxable gains: $49.99M - $30M = $19.99M.
• Federal capital gains tax: 23.8% = $4,759,620.
• Washington capital gains tax: ~$1,729,150 (lower base).
• California state tax: ~$2,659,415 (lower base).
• Total tax: approximately $9.1 million on a $50 million exit (18.2% effective rate).
• After-tax proceeds: ~$40.9 million.
• Tax savings from stacking: $9.2 million.

Note: This example assumes the trusts are structured properly as grantor trusts for income tax purposes, and that each beneficiary is treated as a separate holder of QSBS. It also assumes the founders meet the 5-year holding requirement 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 $10 million per person. If you expect your gain to be only $15 million and you are the sole shareholder, you only need $5 million of exclusion — the stacking strategy 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 the strategy well in advance (12+ months before an anticipated exit). Last-minute gifting is more vulnerable to IRS challenge.

QSBS gifting may not make sense if:

• Your expected gains are under $20 million. A single $10 million exclusion might be sufficient, and the complexity of gifting and trust management may not justify the small tax savings.
• 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 and effective strategy for founders and investors with multiple-million-dollar exits. The New York Times article mischaracterized it as a dodge when it is actually a straightforward application of the tax code as written. Congress explicitly granted each person a separate $10 million exclusion, and there is nothing in the law that prevents a family from benefiting from multiple exclusions.

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

• Make gifts of the actual stock, well in advance of the exit (12+ months is ideal).
• 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 $10 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.

Keep Reading

• The Complete Guide to Qualified Small Business Stock (QSBS): Section 1202 Explained
• 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 Rollovers: How to Defer QSBS Gains When You Sell Too Early