Section 1202 is a federal rule. Most states inherit it automatically, because their income tax starts from federal income and gain the exclusion removed never arrives. A handful of states start from their own definition of income instead, and in those states a fully excluded federal gain is still fully taxed. This is the most volatile corner of QSBS right now, and it’s where the largest number missing from most estimates lives. The QSBS calculator carries a conformity table for every state; this article is the reasoning behind it.
States that tax the gain anyway
As of late summer 2026, five states decline to follow Section 1202 at all. If you’re a resident of one of them when you sell, the entire gain is taxable at the state level, no matter how long you held or which federal tier you reached:
- California, at a top rate of 13.3%. More below.
- Pennsylvania, at a flat 3.07%.
- Alabama, at up to 5%.
- Mississippi, at up to 4%.
- Oregon, at up to 9.9%. Oregon is the newest addition: SB 1507 decoupled the state from Section 1202 entirely, old rules and new, for sales on or after January 1, 2026.
Hawaii is a partial case. It conforms only to the original 50% exclusion, so the state benefit stops at half the gain regardless of your federal tier.
States in motion
Conformity is decided by legislatures, and several have moved recently or are trying to:
- New Jersey went the other direction and started following Section 1202 for sales on or after January 1, 2026. Sell before that date and the gain was fully taxable; sell after and it follows the federal exclusion.
- District of Columbia decoupled by emergency act in December 2025. Congress disapproved that act in February 2026, which put DC back in conformity. Expect another attempt.
- New York conforms today. A bill to decouple was introduced in January 2026 and withdrawn. New York City residents owe roughly another 3.9% of local tax on the non-excluded part.
- Washington has no income tax but levies a capital gains excise tax of 7%, rising to 9.9% on gains over $1 million, above a standard deduction near $278,000. Because it starts from federal capital gain, excluded QSBS gain falls outside it, but the Department of Revenue’s position has been contested and bills to reach QSBS gain directly have already been filed.
- Massachusetts conforms, but also has its own small business stock regime with a separate 3% rate that can apply instead. Worth checking locally before trusting either number.
One more wrinkle for stock on the new tiers. Some states conform to the federal code as of a fixed date rather than automatically, and where that date predates July 2025 the state hasn’t formally adopted the tiered schedule yet. Iowa, Kentucky, Maine, North Carolina, Vermont, and West Virginia are in this position as of this writing. Treat the state figure on a partial-tier sale in those states as unsettled until the legislature catches up.
Why California costs so much more
California had its own version of the QSBS exclusion until a court struck it down in 2012 for favoring in-state companies. The legislature responded in 2013 by repealing the exclusion entirely rather than fixing it, and it has never come back. Every dollar the federal government exempts is fully taxable in California at ordinary income rates, which top out at 13.3%.
On a $3 million gain, that’s roughly $399,000 the federal exclusion does nothing about. For a California angel with a fully qualified five-year hold, the state bill is frequently the entire tax bill, and it doesn’t shrink by waiting. The calculator shows this as its worked example for a reason.
Which state is “your” state
The state that taxes the gain is the one you’re a resident of when you sell, not the one the company is in. A California company sold by a Texas resident owes no California tax on the gain; a Texas company sold by a California resident owes the full 13.3%. Changing residency ahead of an exit is a real strategy and a heavily audited one, and it is very much a conversation for a CPA rather than an article.
The states with no income tax on this gain at all are Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, and Wyoming. Everyone not named on this page follows the federal number. Rates change every session; the calculator lets you overwrite its rate for exactly that reason. This is general information, not tax advice.