Section 1202’s alternative limit of ten times qualifying stock basis can exceed its dollar-limit branch. In a carefully specified, empty-shell example at the post–July 4, 2025 $75 million aggregate-gross-assets ceiling, contributing property worth $75 million can produce a $750 million Section 1202 eligible-gain / exclusion ceiling (10 × $75 million). That figure is the maximum exclusion under those assumptions—not $750 million of total sale proceeds tax-free.
In the zero-basis example below, an $825 million stock sale excludes $750 million under §1202 at the 100% tier and leaves $75 million of pre-contribution built-in gain outside the QSBS exclusion. The special basis rule can shelter qualifying post-contribution appreciation without erasing appreciation that existed before the contribution.
How the ten-times-basis limit works
Section 1202(b)(1) limits eligible gain for a taxpayer’s sales from one issuer during a taxable year to the greater of:
- The remaining applicable dollar limit, subject to acquisition-date, prior-gain, married-return, and coordination rules.
- Ten times the aggregate adjusted basis of qualifying stock from that issuer sold during the year, disregarding additions to basis after original issuance.
The dollar branch starts at $10 million for stock acquired on or before July 4, 2025, or $15 million for stock acquired afterward, with the newer amount indexed beginning in 2027. Applicable holding-period tacking affects acquisition timing. See the complete QSBS guide for the broader requirements.
The exclusion percentage is a separate step. For stock acquired after July 4, 2025, the tiers are 50%, 75%, and 100% after at least three, four, and five years. A $750 million eligible-gain limit does not mean $750 million is excluded at a partial tier.
Keep three basis calculations separate
Assume a founder contributes transferable property worth $75 million, with zero tax basis and no liabilities, solely for newly issued stock in a qualifying Section 351 exchange. Assume no gain is recognized on the contribution and no other basis adjustments apply.
| Basis being measured | Amount in this example | Purpose |
|---|---|---|
| Founder’s ordinary stock basis | $0 | Measures ordinary stock-sale gain under the carryover rules. |
| Founder’s special Section 1202 stock basis | $75 million | Applies for Section 1202 purposes, including eligible gain and the ten-times-basis limit. |
| Corporation’s tax basis in the contributed property | $0 | Measures the corporation’s own gain on an asset sale, subject to later adjustments. |
Section 358 supplies the shareholder’s ordinary carryover-basis framework. Section 1202(i)(1) separately provides a fair-market-value basis floor for stock exchanged for property other than money or stock. Section 362 governs the corporation’s basis.
The special QSBS basis does not become a general stock-basis increase or step up the corporation’s asset basis. If the corporation sells the contributed asset, its own gain requires a separate calculation. A shareholder’s QSBS exclusion does not shelter the corporation’s asset-sale income.
The stock-sale example
Assume the stock is issued after July 4, 2025 and before 2027 into the empty-shell / gross-assets-ceiling boundary case described below, every QSBS requirement is satisfied, all resulting shares are sold in one taxable year after at least five years, and there are no later basis adjustments or selling expenses. Assume the ten-times-basis branch controls.
| Calculation | $500 million sale | $825 million sale |
|---|---|---|
| Gain using $0 ordinary stock basis | $500 million | $825 million |
| Gain using $75 million Section 1202 basis | $425 million | $750 million |
| Ten-times-basis limit | $750 million | $750 million |
| Excluded at the 100% tier | $425 million | $750 million |
| Gain remaining outside Section 1202 | $75 million | $75 million |
The $750 million figure is a limit derived from these assumptions. Enough eligible gain must exist to use it. It is not a universal statutory maximum for every taxpayer or every sequence of issuances and sales.
The remaining gain is not automatically taxed at one assumed combined rate. Its federal treatment, possible net investment income tax, and state taxes must be calculated separately. A federal §1202 exclusion does not automatically stick at the state level; see the 2026 QSBS state-by-state conformity guide. For Washington specifically, see QSBS and Washington taxes.
The contribution must satisfy the gross-assets test
For the issuance period assumed here, the applicable gross-assets ceiling is $75 million. Section 1202(d)(2)(B) measures contributed property using fair market value for this test. Cash, other assets, issuance proceeds, predecessor history, and the statutory aggregation rules also matter.
This is an extreme boundary case—an essentially empty shell in which the entire $75 million §1202(d) aggregate-gross-assets ceiling is consumed by the fair-market-value contribution. The same FMV that creates high §1202 shareholder basis under §1202(i) is what §1202(d) counts toward the ceiling, so high §1202 basis from contributed property sits in tension with the gross-assets test. A $75 million property contribution leaves no room for other gross assets immediately after that issuance. Property worth $76 million alone would exceed the example’s ceiling. This is a boundary illustration, not routine planning. A later separate financing does not automatically disqualify previously issued shares, but integrated transactions require analysis.
The $75 million ceiling is indexed after 2026; earlier issuances use their applicable rules. A satisfactory asset calculation does not replace original-issue, active-business, redemption, taxpayer, or other requirements.
Section 1202(i)(1)(A) starts the property-exchange stock’s acquisition period at the exchange. Time spent developing the property before contributing it does not satisfy that QSBS holding period. Waiting for a higher valuation can increase the special basis while delaying the clock and increasing the risk of exceeding the asset ceiling.
Gifts do not multiply existing basis
Assume the same shares are divided equally among the founder and three eligible nongrantor trusts through respected transfers, with no relevant basis adjustments. Each receives $18.75 million of the existing Section 1202 basis. Each ten-times-basis limit is then $187.5 million; the four limits still total $750 million. Dividing the stock (and its basis) does not create additional aggregate 10× capacity—it only partitions the same $75 million §1202 basis pool. Section 1202(h) can preserve QSBS character and tack holding period for a gift; it does not mint new basis or a new mechanical 10× ceiling.
A recipient’s dollar-limit alternative can matter when allocated basis is low. But receiving shares does not manufacture additional basis, and “#trusts × $15 million” is not automatic. A grantor trust is generally the same taxpayer as the grantor; a nongrantor trust is a separate taxpayer only if the trust and transfer are respected. Section 643(f) aggregation, assignment-of-income, and substance / anti-abuse rules can still collapse or reallocate results. For the full analysis, see the QSBS stacking guide—this page does not duplicate that doctrine.
Verify the property and its value
Identify the rights actually owned and transferred. Completed software, patents, contractual rights, or equipment require their own ownership, restriction, and valuation analysis. A promise to perform future services is different from transferring existing property. Employer, university, licensing, or funding agreements can limit a founder’s rights.
The special §1202(i)(1) floor excludes money and stock. Cash investments and compensatory stock can establish basis under other rules; they are not categorically excluded from the ten-times-basis calculation. A later capital contribution does not increase that limit for previously issued shares merely by increasing ordinary basis.
Support fair market value as of the exchange. A later company financing valuation is not automatically the earlier value of contributed property. An appraisal can be useful evidence, but it does not establish QSBS qualification or justify selecting a value to reach a desired tax result.
What to review before issuance
- Ownership and transferability of the property, with support for its actual value.
- Section 351 qualification, consideration, control, liabilities, and consistent tax reporting.
- Ordinary stock basis, Section 1202 basis, and the corporation’s asset basis.
- The gross-assets calculation, including relevant history and assets immediately after issuance.
- Ongoing C-corporation and active-business compliance, redemptions, holding period, and the expected form of exit.
A stock sale and an asset sale are different tax events. Model the likely transaction before treating the ten-times-basis limit as a usable benefit.
For help reviewing a proposed contribution, book a 20-minute call with Joe Wallin. Please initially share only party names and a brief, non-confidential description; confidential details should wait until a conflicts check and written engagement agreement are complete.
Last reviewed: September 21, 2026. This is a hypothetical illustration and general educational information, not advice for a particular transaction.
