What is a “QSBS Unicorn”? (And How to Become One)
TL;DR - Exit for more than $42M and you can save more than $10M in taxes, making you a QSBS Unicorn (in our book at least).
“QSBS Unicorn” is a phrase we coined here at QSBSrollover.com to call out those founders, investors, or early employees who are able to save more than $10M in gains tax via QSBS.
Sound crazy? Let’s take a look:
The exclusion limit for QSBS under Section 1202 is $10M. This means that if you hold QSBS eligible stock, the maximum gain amount that can qualify for tax-free status under the code is $10M, which amounts to a $2.38-$3.7M tax savings depending on which state you file in.
So, traditionally, a founder who sells her company and nets $15M in gains, will be able to exclude the first $10M from gains tax liability - saving $2.38M if she files in California, and leaving her to pay tax on the remaining $5M.
A QSBS unicorn would be a shareholder who nets more than $42M from their sale of stock, enabling a scenario where even in the states that don’t observe QSBS, like California, New Jersey, and Pennsylvania, the tax saving alone could still be north of $10M.
When a founder has gains that exceed the exclusion cap under 1202, they have two main options for expanding the cap and taking a larger exclusion amount (making themselves “QSBS Unicorn” eligible).
Trust Stacking:
One of the more common ways to push the QSBS exclusion beyond $10M is trust stacking, a strategy where shareholders gift QSBS stock to multiple irrevocable non-grantor trusts before a sale. Since each trust is considered a separate taxpayer, each gets its own $10M exclusion, effectively multiplying the tax-free gains.
Here’s what that looks like in practice:
A founder sets up three trusts and gifts QSBS shares to each of them.
Each trust qualifies for a separate $10M exclusion under Section 1202.
On a sale, instead of just the one original $10M exclusion, the founder and the trusts together exclude $40M tax-free.
Some Cons:
Can be hard to get money out of the trusts for future use (illiquid).
They can be relatively costly to establish.
Many shareholders don’t have enough family members to make this work at scale.
QSBS Rollovers:
Another way to expand the QSBS benefit is by rolling over gains into another QSBS-eligible investment, known as a Section 1045 exchange or QSBS rollover.
Here’s how it works:
If you’ve held QSBS stock for at least six months, you can sell it and defer the gain by reinvesting in another QSBS-qualified company within 60 days.
When you rollover proceeds into new QSBS stock (either a new business or a venture investment), the new stock issuance is covered under a new $10M exclusion cap.
Since each new investment receives a new exclusion cap, one could reinvest sale gains into multiple new ventures, expanding the possible exclusion multiple times.
Heres an example:
Connie has a $35M gain from selling her company stock held for 8 years
Connie pre-planned well and moved $6M of the stock to trusts for her three kids pre-sale, took a $10M exclusion on her original QSBS, paid taxes on $5M for liquidity, and made two separate $7M QSBS rollover investments with the remaining $14M, saving 23.8% in taxes (CA filer), or ~$3.33M, on the rollover portion alone.
This strategy works especially well for serial entrepreneurs and investors who want to keep compounding their gains without ever triggering a big tax bill.
Some Cons:
Most rollover opportunities are very risky (our team fixed that!)
It’s hard to find an opportunity within 60 days (we fixed that, too)
With proper planning, trust stacking, QSBS rollovers, and the original QSBS exclusion the tax savings can amount to more than $10M.
We all want to see QSBS unicorns. Get out there, build, exit, and come to us to work on your Unicorn status.
For more examples of QSBS planning using rollovers, and strategies to become a QSBS Unicorn after your sale as well, check out our planning page.
