What Section 1202 actually does
IRC §1202 allows eligible shareholders of Qualified Small Business Stock to exclude up to the greater of $10 million or 10 times their basis in federal capital gain on the stock, provided (a) the company was a domestic C-corporation at issuance, (b) gross assets were under $50 million at the time of issuance, (c) the company was in a qualified trade or business, and (d) the shareholder held the stock at original issuance for more than five years.
Why Hawaii matters here
Hawaii conforms to federal Section 1202 treatment, which means the excluded federal portion is also excluded at the state level. Your state tax applies only to the portion above the federal exclusion cap.
Stacking strategy at this size
The federal $10M cap is per-taxpayer, per-issuer. Transferring QSBS to irrevocable non-grantor trusts (or to family members) before the sale creates multiple separate taxpayers, each with its own $10M cap. At a $100M gain, you would need approximately 10 stacked exclusions to fully exempt. This requires trust-and-estates counsel, a tax attorney, and typically 12-24 months of administration.
Frequently asked
- Does Hawaii conform to federal QSBS?
- Yes. Hawaii follows federal Section 1202 treatment, meaning the excluded federal gain is also excluded at the state level. Check current-year statute; conformity has shifted in a few states over recent years.
- What's the exclusion cap on a $100M gain?
- With $50k of basis (used here as illustration), the cap is the greater of $10M or 10 times basis. That's $10M. The first $10M of gain is federally excluded at 100%; the portion above that is taxed at 20% federal long-term rate plus 3.8% NIIT. On this gain, $10,000,000 is excluded and $89,950,000 is taxable federally.
- Can I stack QSBS exclusions?
- Yes. The $10M cap is per-taxpayer, per-issuer. Gifting QSBS to irrevocable non-grantor trusts before the sale creates additional taxpayers, each with their own $10M cap. A founder with $80M of QSBS could stack 8 trusts and potentially exclude the full amount federally. The execution bar is high: trusts must be set up well before the sale, funded with real basis-transferring gifts, and administered as separate taxpayers.
- What's the effective tax rate at this size in Hawaii?
- 31.3% on a $100M gross gain. Hawaii participates in the federal exclusion.
Related
Educational · 2025 brackets · Assumes $50k basis, acquired after 9/27/2010 (100% exclusion rate) · Not tax advice