New York does not give you the QSBS exclusion. California does not either. If you're a founder based in NYC, you are paying full state and city income tax on your exit regardless of how long you held your stock.
That doesn't mean QSBS is worthless for NY founders — the federal savings are still enormous. But you need to understand exactly what you're keeping and what you're still paying before you plan your exit.
What Section 1202 QSBS Actually Does Federally
Section 1202 of the Internal Revenue Code lets founders and early investors exclude up to 100% of capital gains on "qualified small business stock" held for at least 5 years. The exclusion is capped at the greater of $10 million or 10 times your adjusted basis in the stock.
To qualify, the company must be a C-corporation with gross assets under $50 million at the time of issuance, engaged in a qualified trade or business (most tech and software companies qualify; service businesses like law, finance, and hospitality generally do not). The stock must be originally issued to you — secondary purchases do not qualify.
| Gain Amount | Federal Tax w/o QSBS | Federal Tax w/ QSBS | NY State + NYC Tax | Total w/ QSBS (NYC) |
|---|---|---|---|---|
| $1M | $238K | $0 | $149K | $149K |
| $5M | $1.19M | $0 | $747K | $747K |
| $10M | $2.38M | $0 | $1.49M | $1.49M |
| $20M | $4.76M | $0* | $2.98M | $2.98M+ |
*Federal QSBS cap is $10M or 10x basis. Amounts above cap remain federally taxable. NY rates: 10.9% state + 3.876% NYC = ~14.776% combined. Federal rate: 20% LTCG + 3.8% NIIT = 23.8%.
NY State QSBS Conformity: The Short Answer
New York explicitly decoupled from federal Section 1202 in its state tax code. When you file your NY state return, you are required to add back any federal QSBS exclusion as income. The full gain is then taxed at ordinary state income tax rates — up to 10.9% for high earners.
NYC residents face a double hit: the city's own income tax adds another 3.876% on top, bringing the combined state + city rate to approximately 14.776%. On a $10 million QSBS gain, that's roughly $1.48 million owed to New York even after you've saved $2.38 million federally.
States that DO conform to Section 1202
- Most US states (default federal conformity)
- Texas (no income tax)
- Florida (no income tax)
- Nevada (no income tax)
- Washington (no income tax)
States that DON'T conform to Section 1202
- New York (explicit decoupling)
- California (does not recognize exclusion)
- New Jersey (partial / no conformity)
- Pennsylvania (limited conformity)
- Massachusetts (partial conformity)
Why NY Founders Should Still Prioritize QSBS
Despite NY's non-conformity, QSBS remains one of the most powerful tax-planning tools available to early-stage founders. The federal savings are substantial — and in most exits, the federal tax burden dwarfs the state tax burden. Here is why it still matters:
Federal savings are still enormous
Eliminating 23.8% on up to $10M is a $2.38M tax saving. That alone justifies structuring your company as a C-corp from day one.
Multiple exclusions are stackable
Each shareholder gets their own $10M exclusion. A founder, spouse, and trust can each hold QSBS, tripling the cap. Some families stack 5–6 exclusions.
Investors benefit too
Angels and early VCs who invested before your gross assets hit $50M also qualify. QSBS is a key selling point in early rounds and improves deal terms.
NY may eventually conform
Legislation to bring NY into conformity with federal QSBS has been proposed but not yet passed. The political environment for founder-friendly tax policy is shifting — but don't plan around a law that doesn't exist yet.
What NY Founders Can Actually Do About the State Tax
I've seen this play out dozens of times in my portfolio. Founders realize late in the game that the NY exclusion doesn't exist and start scrambling. Here are the legitimate options — none of them are silver bullets:
Relocating to a no-income-tax state is the most common strategy. If you genuinely move to Florida or Texas and can demonstrate a real change of domicile — new primary residence, driver's license, voter registration, spending fewer than 183 days in NY — New York will respect it. But NY is aggressive. They audit high-income domicile changes and look for evidence of continued economic ties to NY. Do this two or more years before your exit if you're serious about it.
Charitable giving strategies like donating appreciated stock to a donor-advised fund before sale can offset some of the state tax with a deduction, though NY's charitable deduction rules add complexity.
Qualified Opportunity Zone (QOZ) investments let you defer and potentially reduce capital gains — including the portion NY would tax — by reinvesting gains into a QOZ fund within 180 days of the exit. This works at both the federal and NY state level for deferral purposes.
Model Your Exit With the NY QSBS Calculator
The math on QSBS exits is complicated enough that I built a tool for it. The NY QSBS Calculator at Value Add VC lets you model your exact scenario: gain size, basis, residency, and whether you're NYC-based or upstate. You can see the full federal vs. state tax breakdown and compare outcomes with and without relocation.
The key takeaway from running hundreds of scenarios: even with NY non-conformity, founders who hold QSBS-eligible stock for 5+ years consistently come out significantly better than founders who did not structure for it. The federal savings are that large.
NY does not give you the state exclusion. But the federal exclusion alone is worth millions on a significant exit.
Structure your company as a C-corp, issue QSBS from day one, and plan the NY exit math early — not the week before close.
Model your NY QSBS exit on the NY QSBS Calculator at Value Add VC. Originally published in the Trace Cohen newsletter.