QSBS: What is “QSBS Stacking”?
This week’s question: What is QSBS stacking and why should founders be familiar with it?
Our answer: “QSBS stacking” is a tax planning strategy that multiplies the QSBS exclusion by using various stacking vehicles to have more than one taxpayer own QSBS-eligible stock before a sale. Because the QSBS gain exclusion is subject to cap (as a reminder, the greater of (i) (a) $10M for pre-July 4, 2025 issued stock or (b) $15M for post-July 5, 2025 issued stock or (ii) 10x basis), properly transferring shares to separate taxpayers such as a spouse, adult children, or non-grantor trusts, can increase the total excluded gain across your family and estate plan. Done correctly, stacking can turn a single $10M/$15M cap into up to 5 caps on the same exit.
Key Considerations
Confirm Eligibility First. There’s no point in QSBS stacking unless you confirm your stock is actually QSBS-eligible and meets the other requirements (e.g. issued by a US C-corp, operated in a qualified business, meets requisite holding period, etc).
Timing is Critical. QSBS stacking should be done well before a deal is inevitable otherwise you risk any such stacking will be considered anticipatory assignment of income, meaning the additional gain exclusion could be ignored.
Vehicles for QSBS Stacking. There are many vehicles available for QSBS stacking as outlined below. However, each requires careful coordination and planning, ideally with tax and estate professionals, to ensure you follow the various appropriate (and often complex) rules for gifting, estate planning, exclusions limits, etc.
Gifts: this is an outright transfers for no consideration to other taxpayers (e.g. spouse, adult children, parents, etc) who each use their own QSBS cap.
Non-Grantor Irrevocable Trusts: this is a type of trust in which the trust holds assets for a beneficiary but the grantor cannot control enough to be considered the trust owner. These trusts have special rules so it’s important that there are distinct beneficiaries, independent trustees, real non-tax avoidance purposes, and separate governance to avoid anti-abuse issues (see below).
Partnership Ownership: if you are a partner in a partnership (e.g. an LLC taxed as a partnership), the QSBS gain flows through so that each partner applies his or her own cap.
Anti-Abuse Risks. Even with QSBS stacking vehicles set up, it is important to work closely with a tax and estate planning professional to ensure that your vehicles for QSBS stacking complies with the anti-abuse rules under the tax code and your state’s marital property rules. For example, the IRS may treat multiple trusts with substantially the same grantor and beneficiaries as a single trust being used for tax avoidance, and a married couple filing jointly is typically treated as one taxpayer for the federal tax purposes.
State Law. As a reminder, you still need pay attention to state law because some states (e.g. California, New Jersey and Pennsylvania) do not allow the exclusion so you may owe state income tax on the gains.
Why It Matters
By properly QSBS stacking, a founder with QSBS stock can shield millions (up to 5x) in additional gains on the same exit. However, QSBS stacking only works with clean eligibility, early execution and careful structuring, planning and timing. Still, even a small amount of planning before exit can be the difference between paying a large tax bill or legally avoiding it.
