Run a three-year sale through the QSBS calculator and the tax on the half that isn’t excluded comes out at 28% federal, not the 20% long-term capital gains rate you were expecting. That isn’t a bug in the calculator, and it isn’t a surcharge. It’s the reason a 50% exclusion doesn’t save you 50% of your tax bill.
Long-term gain isn’t one rate
Three years clears the one-year test for long-term treatment easily. But long-term capital gain isn’t taxed at a single rate. Section 1(h) of the tax code sorts it into bands, and one of those bands, capped at 28%, is reserved for two things: collectibles, and “Section 1202 gain,” meaning gain from qualified small business stock that the exclusion didn’t reach. The excluded portion leaves your income entirely. Whatever is left is in the 28% band.
The 28% is a ceiling, not a flat rate. A seller whose ordinary bracket is lower pays that instead. But for anyone with a seven-figure exit in the year of sale, 28% is the number.
On top of that sits the 3.8% net investment income tax, which applies to the non-excluded gain the same way it applies to any other investment income. Excluded gain isn’t in your gross income, so it escapes the NIIT too. Taken together, the taxable part of a partial-tier sale runs at about 31.8%.
What a tier is actually worth
Take a $1 million gain on stock acquired after July 4, 2025, sold by someone in the top bracket:
- Not QSBS: the full gain at 20% plus 3.8% is about $238,000 in federal tax.
- Three years, 50% excluded: $500,000 comes out. The other $500,000 at 28% plus 3.8% is about $159,000. That’s a third off the bill, not half.
- Four years, 75% excluded: $250,000 taxed at 31.8% is about $79,500. Two thirds off.
- Five years, 100% excluded: nothing, federally.
The tiers are still worth reaching. Three years is a real discount, and it’s a discount that stock on the old rules doesn’t get at all. But when you’re deciding whether to wait another year for the next step, price the step at what it actually saves, not at the percentage on the label. The holding period article covers when each step opens.
Why the band exists
None of this is new. The 28% band has held Section 1202 gain since the 1990s, back when the exclusion was 50% for everyone. It just stopped mattering for a decade: stock issued after September 27, 2010 got a 100% exclusion, so for most angels there was never any non-excluded QSBS gain to tax. The 2025 rewrite brought partial exclusions back for everyone, and the 28% band came back with them.
One piece of the old regime that didn’t come back is the alternative minimum tax. Partial exclusions on pre-2010 stock put 7% of the excluded gain back into the AMT calculation. The new tiers carry no AMT preference.
The state layer
All of the above is federal. A state that follows Section 1202 taxes the same non-excluded gain at its own rate, and a state that doesn’t follow it taxes the whole gain regardless of tier. In California, the state bill on a partial-tier sale is often larger than the federal one. This is general information, not tax advice.