Qualified Small Business Stock (QSBS) under IRC §1202 offers a powerful tax exemption of up to 100% of federal capital gains. But what about Texas? Does your 0% federal gain remain tax-free at the state level?
What is QSBS?
Qualified Small Business Stock (QSBS) refers to shares acquired in a qualified C-Corporation under IRC §1202, allowing a federal capital gain exclusion of up to $10 million or 10 times the basis, if held for at least five years.
To qualify:
- The stock must be issued by a domestic C-corporation.
- The corporation’s gross assets must be under $50 million at the time of stock issuance.
- At least 80% of the corporation’s assets must be used in an active business (not including personal services, finance, law, hospitality, or real estate).
Does Texas Tax Your QSBS Gain?
No, Texas does not impose a personal income tax. There is no state-level capital gains tax on QSBS sales if the seller is an individual. Therefore, your 0% federal capital gain under IRC §1202 also results in 0% state tax in Texas for individual holders.
However, for entities like C-Corps:
- The Texas Franchise Tax may still apply.
- If the C-Corp itself sells QSBS, the gain could be included in total revenue for franchise tax purposes, unless deductions apply (like COGS or compensation).
Relevant Tax Forms
Federal:
- Form 8949 – Sales and other dispositions of capital assets
- Schedule D (Form 1040) – Capital gains and losses
Texas:
- Form 05-158-A – Texas Franchise Tax Report (Long Form)
- Form 05-163 – Texas Franchise Tax EZ Computation Report
Example
Scenario:
Emily, a Texas-based founder, sells $9 million of QSBS in 2025 after holding the shares for 6 years.
Federal Impact:
- Qualifies under IRC §1202.
- Claims 100% exclusion on Form 8949 and Schedule D.
- Pays $0 in federal capital gains tax.
Texas Impact:
- As an individual, Emily pays no state tax on this gain.
- If the sale was conducted by a Texas C-Corp, the $9 million gain would likely be reported in the company’s total revenue for Texas Franchise Tax computation.
Compliance Steps
To ensure proper federal and Texas treatment of your QSBS gain, follow these steps:
- Verify eligibility under IRC §1202 with supporting documents.
- Hold the stock for at least five years and retain stock certificates and cap tables.
- Report the sale on federal Form 8949 and Schedule D.
- Determine if your entity is subject to Texas Franchise Tax and include gain if applicable.
- Consult a CPA to plan whether to hold QSBS personally or through an entity.
Conclusion
If you are a Texas resident who owns QSBS, your federal 0% gain likely remains 0% at the state level. Texas does not tax individual income, but business entities must still consider franchise tax implications. Proper structuring and documentation are essential.
Call to Action
Schedule a consultation with Anshul Goyal, CPA, EA, FCA to ensure your QSBS stock sale qualifies for both federal and Texas tax savings. Personalized planning can help you legally structure your exit and minimize taxes.
Disclaimer:
This blog provides general information for educational purposes and does not constitute legal or tax advice. While Texas does not tax individual income, C-Corporations and entities may be subject to Texas Franchise Tax on gains. Please consult a qualified tax advisor to evaluate your situation and applicable tax treatments under IRC §1202 and Texas franchise tax laws.
Top 5 High-Searched FAQs
1. Does Texas have a capital gains tax?
No. Texas does not impose an individual income tax, including on capital gains.
2. Is QSBS taxed by the state of Texas?
No, if you are an individual. C-Corps may face Texas Franchise Tax on QSBS gains.
3. How long must I hold QSBS to qualify?
At least 5 years, per IRC §1202, to claim the 100% exclusion.
4. Can LLCs qualify for QSBS?
No. Only stock issued by a C-Corporation is eligible for QSBS treatment.
5. Can I sell QSBS before 5 years?
Yes, but full exclusion doesn’t apply. A rollover under IRC §1045 may defer gain.
About Our CPA
Anshul Goyal, CPA, EA, FCA is a U.S.-licensed Certified Public Accountant, Enrolled Agent, and Fellow Chartered Accountant. He specializes in U.S. federal and state tax planning for tech founders, startups, and cross-border clients. He advises on QSBS structuring, exit planning, and IRS compliance for U.S. and Indian businesses.