$10M / $15M / 10x basis — the cap arithmetic that decides your ceiling

The two-leg cap

§1202(b)(1) sets the per-issuer cap as the greater of:

1. The statutory fixed amount — $10M pre-OBBBA under §1202(b)(1)(A); $15M post-OBBBA under P.L. 119-21 §70431(a)(4)(B) (per Cornell LII amendment footnote; primary-source confirmation pending) with annual inflation indexing starting TY2027 (methodology to be specified by Treasury guidance; modern federal indexing typically applies the §1(f)(3) chained-CPI approach).
2. 10x the taxpayer's adjusted basisin the QSBS at the time of issuance, per §1202(b)(1)(B). The basis is the taxpayer's basis in the stock — cash paid, FMV of contributed property (§1202(i)), or FMV of services included in income.

The cap is per ISSUER, not per lot. §1202(b)(1) applies the cap to the aggregate gain from QSBS of any one issuer that the taxpayer takes into account during the taxable year. If you hold three lots from the same C-corp and sell all three, the cap is the greater of $10M/$15M or 10× the aggregate basis across the three lots.

When the basis path wins

For founder stock acquired at near-zero basis (typical founder share at incorporation gets you a basis of pennies on the share), the basis path is meaningless — 10× a $0.001 basis × 8M shares is still under $80,000, so the $10M/$15M fixed cap wins.

For employees who exercised options early and filed §83(b) elections, basis is frequently 6–7 figures. At a $2M basis, the 10× path = $20M, beating the post-OBBBA $15M fixed cap. At a $5M basis (late-stage employee with secondary purchase or high-strike option exercise), 10× = $50M. For a Series A primary-investor angel who wrote a $1M check at a $50M post-money, basis = $1M and the 10× path = $10M, equal to the pre-OBBBA fixed cap.

Five worked examples — climbing the basis ladder

All examples assume post-OBBBA QSBS issued 2025-09-01, sold 2030-10-01 (≈ 5.08y hold, satisfies the 5-year tier under §1202(a)(4)). Gain on exit: $28M.

• Basis $0 (founder lot). Cap = max($15M, 10 × $0 = $0) = $15M. In-cap = $15M (excluded 100% = $15M); over-cap = $13M (ordinary LTCG 20% + NIIT 3.8% = 23.8% effective ≈ $3.094M federal).
• Basis $500,000 (early employee with §83(b)). Cap = max($15M, 10 × $500k = $5M) = $15M. Same outcome as $0 basis above — the basis path is still below the fixed cap.
• Basis $3,000,000 (mid-stage employee high-strike exercise). Cap = max($15M, 10 × $3M = $30M) = $30M. In-cap = $28M (all of gain, 100% tier excluded = $28M); over-cap = $0. Federal §1202 tax = $0.
• Basis $5,000,000 (angel primary). Cap = max($15M, 10 × $5M = $50M) = $50M. In-cap = $28M (100% excluded); over-cap = $0. Federal §1202 tax = $0.
• Basis $12,000,000 (late-stage secondary purchase / Series D angel). Cap = max($15M, 10 × $12M = $120M) = $120M. In-cap = $28M (100% excluded); over-cap = $0. Federal §1202 tax = $0. The 10× basis path dominates by a wide margin.

The 10x-basis path becomes dominant at basis above $1.5M (where 10× exceeds the $15M fixed cap). Below that, the fixed cap wins and the basis is irrelevant to the cap calculation. Run any of these in the decoder to verify; the decoder computes both paths and applies the greater.

The over-cap rate is NOT 28%

This is the most-misunderstood part of the §1202 cap. The 28% §1202(a) rate applies only to the unexcluded slice of the IN-CAP portion of a partial-tier exit. The OVER-cap portion has no §1202 treatment at all — it's ordinary LTCG taxed at the 20% top rate under §1(h) plus 3.8% NIIT under §1411, for an effective 23.8% all-in.

Practitioners frequently default to 28% on the over-cap slice because the same sale is on the same Form 8949 line as the §1202 exclusion. The fix on Form 8949 is to split the sale into two entries: one with adjustment code Q for the in-cap slice, one without for the over-cap slice. See the Form 8949 walkthrough for line-by-line mechanics.

Worked example — pre-OBBBA founder over the cap

Founder F received pre-OBBBA QSBS on 2020-03-01 at $0 basis. Sells 2026-05-01 (≈ 6.17y, satisfies §1202(a)(4) 5-year tier) for $35M gain.

• Cap = max($10M pre-OBBBA fixed, 10 × $0 = $0) = $10M.
• In-cap = $10M; over-cap = $25M.
• Exclusion = 100% × $10M = $10M (pre-OBBBA §1202(a)(4)). Federal §1202 tax on in-cap slice = $0.
• Over-cap $25M × 20% top LTCG + 3.8% NIIT = 23.8% × $25M = $5.95M federal.
• Total federal = $5.95M. State conformity overlay applies — for a Californian, the full $35M is California-taxable at up to 13.3% under Cal. Rev. & Tax. Code §17131, adding another ~$4.65M state.

Had F's basis been $2M instead of $0, the cap would be max($10M, 10 × $2M = $20M) = $20M. The over-cap slice would shrink from $25M to $15M, saving 23.8% × $10M = $2.38M federal. Basis matters at high exits.

Multi-issuance arithmetic — same issuer, multiple lots

When you take multiple lots from the same issuer over time, §1202(b)(1) aggregates. The cap is computed on the aggregate basis, not lot-by-lot:

Angel A holds three lots in Acme Inc. — all pre-OBBBA, all 5+ year hold at sale:

• Lot 1: 2021 primary, $500k basis, sold gain $3M.
• Lot 2: 2022 follow-on, $300k basis, sold gain $4M.
• Lot 3: 2023 secondary (from another shareholder), $200k basis. Disqualified — fails §1202(c)(1) original-issuance test. Treated as ordinary LTCG, not QSBS.

QSBS-qualifying lots: 1 and 2. Aggregate basis = $800k. Cap = max($10M, 10 × $800k = $8M) = $10M. Aggregate gain = $7M, fully in-cap, 100% excluded under pre-OBBBA §1202(a)(4). Federal §1202 tax on the $7M = $0. Lot 3's $X gain is separately reported as ordinary LTCG with no §1202 treatment.

Spousal MFJ aggregation — §1202(b)(3) practitioner reading

§1202(b)(3) on its face only halves the cap for married-filing-separately returns. Practitioner consensus — supported by the structural argument that the MFS halving would be redundant if MFJ couples already shared a single cap — is that each MFJ spouse gets a separate §1202(b)(1) cap on the same issuer, so a couple jointly holding QSBS in the same C-corp effectively gets two full caps. The IRS has not formally adopted this reading; consult a tax advisor before relying on the doubling.

Example: Husband H and Wife W jointly hold QSBS in Acme. H owns 100k shares at $1M basis; W owns 50k shares at $500k basis. Both sell at 5y+ for a combined $24M gain (H: $16M, W: $8M).

• H's cap = max($15M, 10 × $1M = $10M) = $15M. H's in-cap = $15M; over-cap = $1M. Exclusion = $15M; over-cap $1M × 23.8% = $238k federal.
• W's cap = max($15M, 10 × $500k = $5M) = $15M. W's gain $8M is fully in-cap; exclusion = $8M; over-cap = $0.
• Household federal §1202 outcome: $23M excluded across the two caps; $1M over-cap; $238k federal tax on the over-cap slice.

Treating the household as a single cap would have produced $15M excluded and $9M over-cap × 23.8% = $2.142M federal — an additional $1.9M federal tax. The practitioner doubling reading of §1202(b)(3) (which the IRS has not formally adopted) is therefore worth $1.9M in this scenario if it holds up.

§1202(i) — property contributed for QSBS

When property other than cash or services is contributed to the C-corp in exchange for QSBS, §1202(i) sets the taxpayer's basis at FMV of the contributed property at contribution. This is a deliberate basis step-up for §1202 cap purposes only — it does NOT step up the basis for §1202(a) gain-recognition purposes (gain on the QSBS is computed against actual carryover basis under §358).

Practical effect: a founder who contributes IP worth $5M (basis $0 in the IP) to a newly-formed C-corp in exchange for QSBS gets a §1202(i)-elevated basis of $5M for cap purposes. The 10× cap becomes $50M. But the §358 carryover basis of $0 governs gain computation — so a $40M exit produces $40M of gain, of which $50M (whole gain) is in-cap and 100% excluded at 5y+. This is the §1202(i) cap-vs-gain mismatch and it's deliberately taxpayer-favorable.

Inflation indexing post-2027

The post-OBBBA $15M cap is annually indexed for inflation starting TY2027 per P.L. 119-21 §70431(a)(4)(B). The indexing methodology is to be specified by Treasury guidance; modern federal indexing typically applies the §1(f)(3) chained-CPI approach used for tax-bracket indexing, but the specific statutory cross-reference inside §70431 has not been primary-source-confirmed here. The decoder uses the baseline $15M figure pre-2027; later inflation adjustments will be added as they're published. The pre-OBBBA $10M cap is NOT indexed — pre-OBBBA stock retains the flat $10M forever.

As of 2026-05-11, no Treasury publication of the 2027 indexed cap figure has been located. The sources page tracks the citation placeholder; we will update with the published figure when it issues.

Common-mistake ladder

• Mistake 1: applying 28% to over-cap gain. Over-cap is regular LTCG (20% + NIIT). 28% applies only to the unexcluded slice of in-cap, partial- tier exits.
• Mistake 2: treating the cap as per-lot. §1202(b)(1) aggregates across all lots from the same issuer for the same taxpayer.
• Mistake 3: forgetting the 10×-basis alternative.Practitioners quote "the $10M cap" without checking the 10×-basis path. For mid-to-late stage employees with §83(b) early exercise, the basis path often dominates.
• Mistake 4: aggregating MFJ spouses into a single cap. Under the practitioner doubling reading of §1202(b)(3) (supported by the MFS halving on the face of the statute, though not formally adopted by the IRS), MFJ spouses each get a separate cap. A couple jointly invested in the same issuer effectively gets two caps under that reading — but consult a tax advisor before relying on it.
• Mistake 5: using §358 carryover basis instead of §1202(i) FMV for contributed property. §1202(i) gives a deliberate step-up for cap- computation purposes. The §358 carryover applies to gain computation, not the cap.
• Mistake 6: applying the post-OBBBA $15M cap to pre-OBBBA stock. The cap follows the rule set; the rule set follows the issuance date. Pre-OBBBA stock keeps the $10M cap forever — see the pre vs post-OBBBA issuance pillar.

State conformity bridge

The cap is a federal §1202(b) construct. State-level treatment depends on the state's conformity to §1202:

• California:decouples under Cal. Rev. & Tax. Code §17131 — the federal cap is irrelevant; the full gain is taxable at up to 13.3% state.
• Pennsylvania:partial conformity at 3.07% flat — federal cap and exclusion don't flow through; the full gain is PA-taxable.
• New Jersey: partial decoupling on NJ-1040 Schedule B.
• Texas and other no-tax states: federal cap is the full picture.

The 50-state gridtracks every state's position with a lastVerified date. The decoder applies the state-conformity overlay automatically on the gross gain, not on the post-cap residual — state treatment is independent of the federal cap arithmetic.

Documentation to retain

• Stock-purchase agreement / subscription agreement showing basis and issuance date.
• §83(b) election copy with IRS-stamped receipt for early-exercise shares — establishes the exercise-date basis as the §1202 basis for cap purposes.
• Property-contribution documentation if §1202(i) applies — appraisal supporting the FMV claim, contribution agreement, board acceptance.
• Issuer balance sheet at issuance proving the §1202(d)(1) gross- asset ceiling test ($50M / $75M).
• Cap-table snapshot at issuance and at saledocumenting the taxpayer's share holdings against the issuer's capital structure.
• Schedule D 28% Rate Gain Worksheet for the year of sale, showing the in-cap / over-cap split.

For the filing-side mechanics, see /form-8949-reporting; for the OBBBA cutover and rule-set determination, see /obbba-cutover-explained. For the decoder's methodology and citation chain, see /methodology and /sources.

Informational, not tax advice. Consult a CPA or Enrolled Agent before acting on a corrective distribution.