How Founders’ QSBS Tax Break Turned Into a Wall Street Play

Goodfin, a wealth platform backed by Y Combinator, launched a venture fund on July 14 built to chase a 0% federal tax rate on startup gains. The vehicle leans on Section 1202 of the tax code, the qualified small business stock break known as QSBS, which Congress rewired for the first time in more than a decade.

QSBS was written for people who spend years building a company that might fail. Its newest customers are outside investors buying in through a fund, and wealthy families multiplying the same exclusion across trusts they never worked a day inside.

The Tax Code Section Behind Goodfin’s Bet

Section 1202 has existed since 1993. Congress wrote it to reward people who put money and years into small companies, the kind that might return nothing or might return a fortune.

The deal is simple on paper. Hold eligible stock long enough, and some or all of the gain skips federal tax when you sell.

The exclusion has not always been this generous. It started at 50%. In 2009 it rose to 75%, and a year later Congress pushed it to full strength, increasing again in 2010 to 100 percent, a rate lawmakers made permanent five years later.

To qualify, a company must be an active domestic C corporation, not an LLC or S corp, and the shares must come directly from the company at issuance rather than a secondary purchase. A size test on the company’s assets applies too, and that test is exactly what changed in 2025.

How the One Big Beautiful Bill Act Rewired the Math

President Trump signed the One Big Beautiful Bill Act on July 4, 2025. Buried inside was the biggest rewrite of Section 1202 since its 100% exclusion became permanent.

The old rule worked like a cliff. Sell before five years and the exclusion was zero. The new law replaces that cliff with a ramp for any stock issued after July 4, 2025.

Two dollar figures moved as well. A company’s gross assets can now reach $75 million and still issue QSBS, up from $50 million. That single change reshapes the payoff further out: because the alternative exclusion runs on 10 times an investor’s cost basis, one tax advisory firm found the math now points toward a potential maximum of $750 million, according to Baker Tilly.

The flat per-taxpayer cap moved too, from $10 million to $15 million for each company an investor holds. Both dollar figures are set to grow again with inflation starting in 2027.

From Founder Perk to Fund Product

On July 14, Goodfin turned that math into a product. The San Francisco firm, founded in 2022 and backed by Y Combinator, unveiled the Goodfin QSBS Venture Fund. The pitch: pool money from accredited investors into Seed through Series C startups already screened for Section 1202 eligibility, and target up to 0% federal tax on qualifying gains.

Every prospective portfolio company gets vetted before a dollar goes in, then monitored for the life of the holding. Goodfin works with CapGains Inc, a tax optimization platform, to run that screening and track compliance through the holding period, Pulse2 reported.

QSBS is one of the most under used advantages in venture investing, but also one of the most complex to get right. Goodfin built this fund to remove that friction.

Anna Joo Fee, founder and chief executive of Goodfin, said that in the fund’s launch materials.

The fund also accepts Section 1045 rollovers. An investor who already booked a QSBS gain can push the proceeds into a new qualifying company within 60 days and keep the exclusion alive, compounding the same tax break across one startup bet after another.

• 0% is the target federal capital gains rate the fund is built around
• $15 million is the new per-issuer exclusion cap, up from $10 million before July 2025
• 60 days is the window investors get to roll gains into new QSBS under a Section 1045 exchange
• Seed through Series C is the stage range the fund targets among YC and VC-backed startups

A Trust Stacking Trick Multiplies the Ceiling

The $15 million cap applies per taxpayer, per company. Nothing in the law caps how many taxpayers one family can become.

That gap is the opening for a technique wealth advisors call stacking. A founder or early employee gifts QSBS shares into multiple irrevocable trusts, each one treated by the IRS as its own taxpayer, each carrying its own exclusion.

J.P. Morgan Private Bank walks through the arithmetic. A founder who keeps shares personally and also gifts stakes into three separate trusts ends up with four taxpayers tied to one company’s stock, each able to shield up to $15 million from federal tax. Add it up and a single startup exit can carry as much as $60 million in excluded gain across one extended family.

Where the Break Runs Into Friction

Three things can undercut the exclusion before a founder ever collects it.

The first is geography. State rules do not automatically follow the federal exclusion. New York conforms to the federal QSBS break, tax advisory firm Weaver notes, while California does not, taxing the gain at ordinary state rates no matter how long the stock was held.

The second is paperwork. There is no upfront government sign off on eligibility. Companies and shareholders largely self-certify, and tax advisory firm RSM US LLP has flagged what that means in practice: current guidance gives taxpayers a certain level of leeway in concluding on qualification, an ambiguity that can cut against a founder just as easily as for one.

The third is size. A funding round that pushes gross assets over $75 million permanently disqualifies any new stock the company issues afterward.

“If the company’s gross assets have ever exceeded $75 million or the corporate bank account reaches $75 million, it cannot issue any more QSBS,” said Gigi Orta, managing director and wealth advisor at J.P. Morgan Private Bank. “Even if assets later decline, eligibility doesn’t come back.”

What Should Founders Do Before Their Next Raise?

Founders should treat QSBS as a structuring decision made years before an exit, not a line item to check at closing. That means confirming entity type, logging issuance dates, and tracking the asset test long before a big round can wreck eligibility for good.

• Confirm the company is a C corporation before the next round closes; LLCs and S corporations cannot issue QSBS unless they convert first.
• Log the exact date each share or option gets issued, since the three, four and five year tiers all run from that date.
• Track gross assets at every raise, since crossing $75 million permanently shuts off new QSBS issuance for the company.
• Check state tax treatment before an exit, since a federal exclusion does not guarantee a state one.

Both headline dollar figures move again in 2027, when the $75 million asset ceiling and the $15 million exclusion cap index for inflation for the first time, growing without Congress voting on either one.

Frequently Asked Questions

Does QSBS Apply to Stock I Already Own From Before 2025?

Yes, but the older rules still govern it. Stock issued before July 5, 2025 keeps the original five-year cliff, the $10 million cap and the $50 million asset test. A company that has raised money both before and after that date can have two sets of QSBS rules running on shares from the same business, so keeping separate records for each batch matters.

Can an LLC Ever Qualify for QSBS?

Only if it elects to be taxed as a C corporation. An LLC that has checked the box to be treated as a C corporation for federal tax purposes can issue QSBS just like a traditional corporation, but a default LLC or S corporation cannot, no matter how long the stock is held.

What Happens to QSBS if My Company Gets Acquired Before I Sell?

“If a small business gets acquired by a larger business, then one can continue a holding period with the acquiring company stock,” said Lauren Clark, executive director and banker at J.P. Morgan Private Bank. “When one eventually sells, they’ll have the same QSBS exclusion they would have had at the time of the acquisition.” The clock does not reset just because the stock changes hands in a merger.

Does a Fund Like Goodfin’s Guarantee the Tax Exclusion?

No single fund or advisor can guarantee QSBS treatment. Eligibility is decided by the IRS at the time of sale, based on facts about the company going back to issuance. Pre-screening lowers the odds of a surprise, but it is not a binding ruling, and a company that later fails the active business test can still cost an investor the exclusion.

Why Do Some States Still Tax QSBS Gains?

Because states write their own conformity rules and are not required to follow federal tax changes automatically. A state can decouple from Section 1202 entirely and tax the gain at its normal capital gains rate, which is what a handful of states, including California, currently do regardless of how long the federal exclusion has run.

Disclaimer: This article is general information, not personalized tax or legal advice. QSBS eligibility is fact specific and high stakes, so confirm your situation with a licensed tax professional before relying on any figure above, which reflect public rules as of July 2026.