A startup with a $300 million valuation can still satisfy the QSBS gross-assets test, but valuation alone cannot tell you whether it does. §1202 generally counts cash plus adjusted bases of other corporate property, with a special FMV-at-contribution rule for contributed property. At the shareholder level, a separate FMV floor can affect §1202 basis for qualifying property-for-stock exchanges. Neither rule is simply “tax basis for the company, FMV for the shareholder.”
There are really two separate questions hiding inside “do I have QSBS?”
- Does the company qualify?
- How much can the shareholder exclude?
They run on different rules. The difference at a glance:
| Company-Level Test | Shareholder-Level Test |
|---|---|
| Purpose: QSBS qualification | Purpose: 10× basis eligible-gain limit |
| Metric: Adjusted tax basis of the corporation's assets, plus cash | Metric: Qualifying basis of issuer shares sold during the tax year; later basis additions disregarded |
| Statute: §1202(d)(2)(A) | Statute: §1202(b)(1)(B) |
| Contributed property: Counted at FMV at contribution under §1202(d)(2)(B) | Contributed property: Stock basis deemed no less than FMV of property contributed under §1202(i)(1)(B) |
Question 1: Does the company qualify? (The gross-assets cap)
For stock issued after July 4, 2025, the gross-assets ceiling is $75 million, subject to indexing after 2026; the earlier ceiling is $50 million. Apply the historical test to the corporation and any predecessor and the immediately-after-issuance test, including amounts received in the issuance. Aggregate members of the qualifying parent-subsidiary controlled group under §1202(d)(3). Reconfirm the applicable year’s indexed figures before relying on this guide.
Under §1202(d)(2)(A), aggregate gross assets generally equal cash plus adjusted bases of other property. Section 1202(d)(2)(B) modifies the computation for contributed property and property with a basis derived from it. Gross assets are not net assets: corporate liabilities do not simply reduce this total.
Enterprise value can greatly exceed statutory gross assets because organic appreciation does not itself reset tax basis. But the asset test is not a cumulative-capital-raised test: cash spent, capitalized costs, acquired assets, contributions and financing proceeds can change the calculation. A high valuation neither proves nor disproves eligibility.
A software company whose code was developed internally may have very little tax basis in its single most valuable asset. That is one reason rapidly appreciating startups often remain well below the gross-assets cap despite high valuations.
The wrinkle: contributed property is counted at FMV
For the gross-assets test, determine the adjusted basis of contributed property as if its basis immediately after contribution equaled its then-FMV. The rule also reaches other property whose basis is determined wholly or partly by reference to the contributed property. Later adjustments still matter; §1202(d)(2)(B) does not impose perpetual revaluation at current FMV.
The contribution rule prevents appreciated property from entering the gross-assets calculation solely at a low carryover basis. It applies at the corporate level even though a separate shareholder rule may also use contribution-date FMV.
Question 2: How much can the shareholder exclude? (The 10× cap)
The §1202(b) ceiling limits eligible gain taken into account, before applying the exclusion percentage. It is the greater of the remaining applicable dollar limit or ten times the aggregate qualifying basis of that issuer’s shares disposed of during the tax year, disregarding basis additions after original issuance. The dollar-limit component is $10 million for the older acquisition regime and $15 million for the newer regime, with prior-use and coordination rules and indexing of the $15 million amount after 2026. It is not automatically the amount actually excluded. See §1202(a) and (b).
Under §1202(i)(1), an exchange of property other than money or stock for corporate stock has a special acquisition-date rule and a stock-basis floor equal to the property’s FMV for §1202 purposes. This does not generally reset the shareholder’s basis for all federal income-tax purposes. It also prevents pre-contribution appreciation from being treated as §1202-excludable gain.
Contributed-property FMV can matter to both the company’s gross-assets test and the shareholder’s §1202 basis. Distinguish corporate asset basis, ordinary shareholder stock basis, the special §1202 basis, and the eligible-gain limit.
Where the two collide: contributing appreciated property
Assume a qualifying property-for-stock contribution: property worth $20 million has $2 million of tax basis, no liabilities are assumed, and ordinary carryover-basis treatment applies. Assume no other basis adjustments and that all of the received shares are later sold.
- For the company's gross-assets test, that property counts at its $20 million FMV — eating $20 million of the $75 million qualification headroom.
- For §1202 purposes, the shareholder’s stock basis is at least $20 million. If all those shares are disposed of during the same taxable year and no other adjustments apply, the ten-times-basis alternative is $200 million of eligible-gain capacity. This is not a $200 million tax saving or a guaranteed exclusion.
Suppose those shares later sell for $30 million. With $2 million ordinary stock basis, total gain is $28 million. The $20 million §1202 basis floor leaves at most $10 million of post-contribution gain for §1202 treatment; the $18 million pre-contribution appreciation is outside that exclusion. The actual exclusion still depends on the acquisition regime, holding period, issuer tests and other conditions.
The takeaway
The company’s gross-assets test and the shareholder’s eligible-gain ceiling are separate calculations. Contributed-property FMV affects both, while the special §1202 basis can also limit which appreciation is excludable.
Confuse the two and you make one of two mistakes — assuming a company qualifies when contributed FMV has quietly blown the cap, or undervaluing the exclusion ceiling because the FMV floor on stock basis was forgotten.
Retain issuance-date asset calculations, controlled-group and predecessor records, contribution-date valuations, and shareholder basis records. Update factual substantiation as relevant events occur. Annual QSBS substantiation can organize the evidence; a letter is not an IRS certification or a substitute for satisfying the statute.
If you are contemplating contributing appreciated property to a C corporation — or converting an LLC and wondering what it does to both caps — that is a conversation worth having before you sign, not after. Book a 20-minute call.
This post is general information, not legal or tax advice, and does not create an attorney-client relationship. Section 1202 is fact-specific; consult your own advisor about your situation.
