The Section 1202 QSBS exclusion is $10 million per investment. Not per year. Not per investor lifetime. Per qualifying investment in a separate company.
That means investors who make multiple qualifying YC investments don't get one $10M exclusion — they get one per company. Ten qualifying investments means a potential $100M in federal capital gains that could be excluded. Twenty means a potential $200M.
This is QSBS stacking, and it is legal, deliberate, and exactly what Section 1202 was designed to encourage.
How the stacking works
Section 1202 provides an exclusion on gain from the sale of Qualified Small Business Stock. The exclusion limit is the greater of $10M or 10 times adjusted basis per "eligible taxpayer per issuer." The phrase "per issuer" is the mechanism.
Each company is a separate issuer. Company A has its own $10M ceiling. Company B has a completely separate $10M ceiling. They don't share a cap and don't aggregate. A gain of $9M on Company A and $9M on Company B is eligible for $18M in total exclusion.
For investors who write checks into 15-20 YC companies per batch across 3-4 batches, the aggregate potential exclusion can reach $150-200M — assuming each company qualifies and each position is held for five years.
The $10M exclusion is per company, not per investor. Every qualifying YC investment is a separate exclusion bucket. The stacking is built into the statute.
The pass-through mechanics for fund LPs
If you invest through a venture fund structured as a limited partnership, QSBS status of portfolio investments passes through to you as an LP. Each portfolio company is a separate issuer — your share of the gain from Company A has its own $10M exclusion ceiling, separate from your share of Company B's gain.
The pass-through works because the fund is a partnership, tax transparent. The underlying investment characteristics — including QSBS eligibility — flow through to the partners. If you are an LP in Eight Capital Fund II and the fund holds 15 QSBS-qualifying companies, you potentially have 15 separate exclusion buckets.
Two structures break the pass-through: investing through a C-corporation, and investing through a fund structured as a corporation. Standard LP structures in US venture funds preserve it.
The 10x basis rule for larger checks
The exclusion ceiling is the greater of $10M or 10x your adjusted basis. For most seed-stage YC investments, $10M is the binding constraint — a $100K check has a 10x basis of $1M, well below $10M.
For investors writing $1M+ at seed, the 10x rule becomes more generous: a $1.5M seed investment has a 10x basis of $15M, exceeding the $10M floor. The exclusion ceiling is $15M, not $10M.
What breaks the stack
Each investment must independently qualify. A company that fails the $50M gross asset test, converts from a C-corp, or operates in an excluded industry breaks that link in the chain — but other investments are unaffected. Secondary market purchases don't qualify, even if the company would otherwise — QSBS requires original issuance directly from the company.
The stacking isn't a strategy to construct. It's the natural result of investing in multiple qualifying companies. Every check into a separate YC company is a separate exclusion. The only thing required is holding for five years.
This post is informational only and does not constitute tax or legal advice. Consult a qualified tax advisor before relying on Section 1202.