What is QSBS?
Qualified Small Business Stock (QSBS) under §1202 of the Internal Revenue Code allows eligible founders, employees, and investors to skip paying federal taxes on capital gains when they sell their stock after holding it for five years, provided they meet the statute’s qualifying criteria. This means that a founder, for example, can exclude up to 100% of capital gains on a sale of the QSBS, creating a significant tax benefit and incentive to purchase QSBS.
A huge regime shift occurred in 2025 upon the passage of the One Big Beautiful Bill Act (OBBBA) by the Trump administration. Prior to the OBBBA, the asset cap for QSBS was $50 million with an individual cap of $10 million. However, under the new OBBBA regime, the asset cap is now $75 million with an individual cap of $15 million. Accordingly, founders are incentivized to invest in small businesses and startups, particularly in Silicon Valley, due to the high tax benefit available after holding the stock for just five years. In other words, §1202 seems to reward investing in small businesses because founders benefit by not paying taxes on federal capital gains from the future sale of QSBS shares.
What is QSBS Stacking?
Congress encourages startups, entrepreneurial ventures, and small businesses under §1202, and expressly allows transfers of QSBS shares.
One planning strategy that has emerged is known as QSBS “stacking.” Under §1202(h)(2), when QSBS is transferred to certain trusts or other eligible taxpayers, the transferee may be entitled to its own QSBS gain exclusion. As a result, founders often establish trusts, usually within their families, to hold QSBS shares and potentially access multiple exclusion amounts.
By using this strategy, a founder may be able to increase the total amount of gain eligible for exclusion beyond the founder’s individual limitation. In some cases, multiple trusts can significantly expand the aggregate exclusion available to a family. For example, a founder might transfer QSBS shares to a trust established for the benefit of a child. If the trust qualifies for its own §1202 exclusion, that exclusion may be available in addition to the founder’s exclusion, thereby increasing the overall tax benefit associated with the QSBS shares.
The Rising Scrutiny of QSBS Stacking
The Wall Street Journal has reported on potential concerns raised by QSBS stacking.[1] As reported by the Journal, a Treasury official expressed disapproval of stacking, stating, “We don’t like stacking, OK?” The Journal described an example in which two brothers with no children established 18 trusts between them to multiply the exclusion amount. Some structures involve setting up multiple trusts benefiting overlapping beneficiaries. For instance, a founder with three children (John, Jane, and Joan) might establish a trust for each and then establish additional trusts jointly for John and Jane, John and Joan, and Jane and Joan. Kenneth Kies, the tax policy official, is quoted by the Journal as saying, “People are going beyond that and they’re setting up other trusts. It’s something we’re taking a close look at.”
Aggressive stacking structures relying on 1202(h)(2) may attract IRS scrutiny and, depending on how they are structured, could be viewed as inconsistent with the policy objectives underlying 1202’s incentives for small business investment. As of this writing, the IRS has not issued guidance or notices specifically addressing these structures.
The scale of the exclusion is significant and growing. As reported by The Wall Street Journal, the QSBS exclusion is estimated to reduce federal revenue by $4.9 billion this year, according to the congressional Joint Committee on Taxation-more than triple what it was in 2017. The Journal further reported that, from 2012 through 2022, taxpayers claimed QSBS exclusions of $140 billion, according to a 2025 Treasury Department study, and that the exclusions peaked in 2021 at about 2.5% of all capital gains. That year, according to the Journal’s reporting, trusts and estates made 17.5% of QSBS claims, more than a decade earlier. The Journal also reported that a number of advisory firms now offer services to facilitate QSBS trust planning, marketing lower fees than attorneys typically charge. For example, one firm reportedly offers QSBS packages for up to four trusts; its founder, Alejandro Chesser, is quoted by the Journal as stating that this kind of trust planning should be more affordable for company founders and that his Nevada trust company has served 500 customers in 10 months.
At present, few court decisions or IRS regulations directly address QSBS stacking or the scope of §1202’s allowance for transfers. As reported by The Wall Street Journal, that lack of guidance, together with the absence of any requirement for detailed taxpayer reporting to the IRS, has been described by Manoj Viswanathan, a professor at UC Law San Francisco, as leaving the exclusion without effective guardrails given the extent of stacking it permits. Founders may wish to monitor for forthcoming guidance; the Journal reported that Kies has indicated such guidance would likely address what the government views as aggressive planning. Taxpayers should also bear in mind that a good-faith belief in the validity of a structure does not, by itself, preclude an IRS challenge or the imposition of penalties, and advisors vary in how conservatively they approach these arrangements.
One potential avenue for the government to address QSBS stacking is IRC §643(f), which authorizes Treasury to treat two or more trusts as a single trust where the trusts have substantially the same grantors and beneficiaries and a principal purpose of the arrangement is the avoidance of federal income tax. Section §643(f) may provide a mechanism to challenge the most aggressive stacking structures-particularly those layering multiple trusts for overlapping beneficiaries. It is also possible that any new guidance would apply prospectively, potentially grandfathering existing structures rather than unwinding arrangements already in place.
The Future of QSBS Stacking
QSBS stacking creates meaningful opportunities for wealth transfer and multigenerational estate planning. By utilizing the transfer provisions of §1202, founders may be able to increase the amount of gain eligible for exclusion beyond the individual $15 million limitation, making QSBS an increasingly important consideration in both tax and estate planning strategies.
In this post-OBBBA regime, the enhanced benefits available under §1202 are likely to encourage continued investment in startups and small businesses, while also driving greater interest in QSBS-related trust planning. Although legitimate estate-planning applications of QSBS stacking may continue to thrive, aggressive arrangements designed primarily to multiply exclusion amounts could attract increased IRS scrutiny.
In the second post in this series, we will examine how to approach and navigate §1202 and QSBS stacking in light of current regulations in this post-OBBBA regime.
The author gratefully acknowledges the research assistance of Chloe Hooten, Legal Intern at Shields Legal Group, in the preparation of this article.
This post is for informational purposes only and does not constitute or contain tax or legal advice.
[1] https://www.wsj.com/personal-finance/taxes/silicon-valley-is-obsessed-with-trust-stacking-and-the-irs-doesnt-like-it-a542519b
