QSBS Conformity by State: Which States Follow Section 1202

Does my state follow the federal QSBS exclusion?

Most states with an income tax do. They start from federal income, so gain excluded under section 1202 stays out unless the state's own law adds it back. A short list of states departs, and that list is changing for sales in 2026 and later. The table gives each state's status for a sale in 2026, taken from that state's own statute, bulletin or instructions.

No official 50-state list exists, so each row rests on that state's own pages. "Follows" means the state's modification lists contain no section 1202 add-back, and the state ties to the federal code as the tables below show.

What makes a case harder than a lookup:

• You moved, or plan to. The state where you live when you sell generally decides, so a move changes which row applies.
• Payments arrive over several years. Escrow, holdback and earnout money may be taxed in a later year under that year's state rule.
• The state is changing its law. Oregon, Illinois, Vermont, Rhode Island, Maine and New Jersey have changed their rules recently, a bill is in committee in New York, and Maryland's 2026 bill did not advance.

Gather your residence history with dates, each lot's acquisition date and cost, the expected sale date, and the deal documents.

Which states do not conform to QSBS, or only in part?

Eleven states differ from the federal exclusion for a 2026 sale or soon after. Two tax the gain in full, four add it back for 2026 or for newer stock, Rhode Island adds it back from 2027, and four follow a frozen or own version.

Notes on the harder rows:

• Oregon. The Department of Revenue lists SB 1507 as Oregon Laws 2026, chapter 142, and notes that a referendum petition against it was filed in April. The Secretary of State's page for the November 3, 2026 general election says no statewide ballot measures are on the ballot, but neither page states what became of the petition. Confirm the law's status before you rely on it.
• Massachusetts. The statute defines the federal code as amended on January 1, 2024, and the Commission's report says that means a 5-year hold, a 100% exclusion and none of the 2025 changes. The state's budget pages disagree with each other and with the statute on the code year and the share (the older item 1.042 uses the 2005 code), so do not rely on them. The reduced rate applies only to stock of a corporation domiciled in Massachusetts. Treat Massachusetts as a case for professional review.
• South Carolina. The department's information letter says the state has not considered the 2025 federal changes (IL 26-4). A bill to update the date, H. 3368, failed in the Senate on March 31, 2026. For a 2026 sale this generally changes nothing, because stock acquired after July 4, 2025 cannot reach the federal tiers before mid-2028; the example below shows newer stock.
• Rhode Island. The 2027 add-back is in the Division of Taxation's summary, which lists the budget act (House Bill 7127 Substitute A, as amended) as enacted and effective June 12, 2026.

States not confirmed

A state is "not confirmed" when its own pages did not settle the rule. Do not assume either way.

Which states clearly follow the QSBS exclusion?

Twenty-eight states follow it for a 2026 sale. Each starts from federal income, and its additions to federal income list no section 1202 item. The tie column shows how the state follows the federal code: a rolling tie picks up federal changes automatically, and a fixed tie stops at a date.

In New York, a large exclusion is worth a check against the minimum income tax: its instructions (posted edition dated 2013) list stock gain excluded under section 1202 as a tax preference item (Form IT-220 instructions). Georgia's 2025 booklet said the state had not adopted the 2025 federal law; H.B. 1199 later made its tie retroactive.

What does "conform" mean: current code, a fixed date, or the state's own rule?

A state conforms in one of three ways, and the way decides what happens when federal law changes.

A state's general tie does not settle section 1202 on its own. Rhode Island is rolling in general but decouples from section 1202 by name from 2027, and Hawaii updated its general tie but kept section 1202 as it stood at the end of 2024.

Why does a fixed-date state matter for the 2025 federal changes?

It matters when the state's date comes before July 4, 2025, because the state then has not adopted the larger federal exclusion. The 2025 federal law changed the exclusion for stock acquired after July 4, 2025, and added tiers that start at 3 years of holding (Public Law 119-21, section 70431). Stock acquired after that date cannot reach the new tiers before July 2028.

States tied to a date before July 4, 2025 in the tables above are South Carolina (December 31, 2024), Hawaii (section 1202 as of December 31, 2024), Massachusetts (January 1, 2024), Arkansas (January 1, 1995) and, by default, Michigan (January 1, 2025, with the option to use the current code). The other fixed-date states in the tables use a date after July 4, 2025. For a 2026 sale of older stock, the question is whether the state follows section 1202 at all; for stock bought now and sold from mid-2028, the question is whether the state will have updated its date by then. See QSBS for founders and early employees for the federal tiers.

Does the state where the company is based or incorporated matter?

Generally no. Gain from selling stock is sourced to where you live when you sell, not to where the company is based or incorporated. California's residency guide says the gain "has a source where you are a resident at the time of the sale", and gives an Oregon resident selling stock of a California corporation as an example of a gain California does not tax (FTB Publication 1031).

A few state rules do look at the company. Massachusetts' reduced rate applies only to stock of a corporation domiciled in Massachusetts (M.G.L. c. 62, section 4). Rules for options and for stock held in a business can differ; they belong to the moving guide below.

If I move before a sale, which state's rule applies?

The rule of the state where you are a resident when you sell generally applies, so moving from a state that taxes the gain to one that does not can change the result. California says a resident is taxed on all income, whatever its source (FTB Publication 1031).

Whether you have really moved is a question of facts and dates, not a change of mailing address, and a part-year move creates two returns. Residency tests, option and RSU sourcing, and the move-year return are in moving to another state before selling startup shares. If a sale and a move fall in the same year, the order matters enough to review before you sign.

A state with no income tax: is the QSBS gain tax-free there?

These states do not tax the gain as individual income, according to each state's own source below. Washington has separate taxes to check.

A move to one of these states does not by itself end your old state's tax on income earned there or on a sale made before the move. Other taxes these states charge, and what a move does and does not end, are in states with no income tax: what an owner still pays.

What if the sale pays over several years, such as escrow or an earnout?

A payment received in a later year is generally tested under the state's rule for that year, so a start date in the tables can change the answer for the later payment. Rhode Island's add-back begins with tax years beginning on or after January 1, 2027, Illinois's with tax years ending on and after December 31, 2026, and New Jersey's exclusion with tax years beginning on or after January 1, 2026.

Where you live when each payment is taxed can matter too, which is why a move between payments needs review. How escrow, holdback and earnout payments are taxed federally is in escrow and holdback payments and earnout payments.

How do I report the state difference on my return?

A state that does not follow the exclusion has you add the excluded gain to your federal income on its own form. Oregon, Illinois and Vermont write the add-back into their statutes as an addition to federal income. California has you enter the entire gain on Schedule D (540) and carry the difference to Schedule CA (540) (Schedule D (540) instructions); the lines are in state tax on QSBS gains.

A state that follows the exclusion needs no entry beyond your federal figures. Keep the federal Form 8949 and Schedule D detail with the state return, because a state addition starts from the amount you excluded. How to claim the federal exclusion is in the QSBS guide.

How do I confirm my state's rule for the year of the sale?

Check the state's own pages for the tax year of each payment, not last year's booklet. Several of the rules above changed in 2026, and booklets printed earlier can say the opposite.

1. Find the state's list of additions and subtractions to federal income for that year, and search it for section 1202 or small business stock.
2. Find how the state ties to the federal code: rolling, or a fixed date, and which date.
3. Look for a conformity or federal-changes notice from the state tax agency for the year.
4. Search the state legislature's site for bills that add back or restore the exclusion. New York S8921A and Maryland H.B. 801 are examples that had not become law when checked.
5. Re-check just before the sale and again at filing; a bill passed after the sale can still apply to the tax year.

If your state shows in the "not confirmed" or "follows only in part" rows, or you hold stock in more than one state's name, the answer needs a professional read of the current statute.

Example

These examples are illustrative, in US dollars, and assume the shares qualify for the federal exclusion.

Founder in Wisconsin sells older shares

A Wisconsin resident sells founder shares for a $2,000,000 gain, all excluded on the federal return. Wisconsin applies section 1202 as in effect for federal purposes, so there is no Wisconsin add-back and the $2,000,000 stays out of Wisconsin income. The founder still checks the current Wisconsin instructions for the sale year.

Rhode Island resident paid over two years

A Rhode Island resident sells shares in December 2026 for a $1,000,000 gain, with $600,000 paid at closing and $400,000 released from escrow the next year. Rhode Island follows the exclusion for the first year, so the $600,000 is excluded. If the second payment is reported in a tax year beginning on or after January 1, 2027, Rhode Island adds back the amount excluded on it. The resident confirms the Rhode Island rule for that later year before relying on the exclusion.

Buyer of new shares in a fixed-date state

A founder in South Carolina buys newly issued shares now and sells them after four years for a $1,500,000 gain. Federally, the 4-year tier excludes 75%, or $1,125,000. South Carolina follows the code as amended through December 31, 2024, which excludes gain only on stock held more than 5 years. Unless South Carolina updates its date by the sale year, none of the $1,500,000 may be excluded there, so the founder checks the state's date for that year.

Different for you?

• You moved, or may move, before the sale. Residence dates and option sourcing decide which row applies: moving to another state before selling startup shares.
• You live in California. The rate, estimated payments and form lines are in state tax on QSBS gains.
• You are not sure the shares qualify, or acquired them before July 4, 2025. See QSBS for founders and early employees.
• The company is being acquired for cash and buyer stock, or in a merger or asset sale. See taxes when your startup is acquired.
• You are selling before the holding period ends and want to defer. See rolling over QSBS gain into new startup shares.
• Your state is in the "not confirmed" or "follows only in part" rows, the gain is large, or a move and a sale fall in the same year. These cases turn on the current statute and your dates, and a filed return is hard to unwind. The startups service page covers state review before a sale.