Gregg D. Polsky (NYU) & Ethan Yale (UVA): Fixing the QSBS Stacking Problem, 192 Tax Notes Fed. 1769 (Sept. 7, 2026)
As nearly every sentient U.S. tax adviser knows by now, section 1202, which shelters certain gains from the sale of qualified small business stock (QSBS) from tax, is manna from heaven for the venture capital industry. While originally billed in 1993 as targeted tax relief for small business investors, the QSBS tax break has evolved over the years into a gargantuan windfall captured almost entirely by venture capital fund general partners, wealthy angel investors, and founders of successful start-up companies. As a result, we have previously argued that Congress should repeal section 1202 or at least substantially redesign it to better achieve its original purpose of subsidizing small businesses.
In this article, however, we focus on one well-known QSBS problem, colloquially known as “stacking,” and potential responses to stacking short of a legislative fix. In general, excluded QSBS gain is limited to the greater of 10 times the basis of QSBS sold during the year (the 10x basis cap) or $15 million, reduced by any prior excluded gain on stock issued by the same issuer (the $15 million per-issuer cap). (For QSBS acquired before July 4, 2025, the per-issuer cap is $10 million.) Founders, angel investors, and venture capital carried-interest holders typically have little if any basis in their QSBS stock, so the $15 million per-issuer cap is the key constraint. Stacking involves gifting QSBS to family members and to nongrantor trusts that benefit family members, thereby effectively multiplying the $15 million per-issuer cap. A recent Wall Street Journal article described a proposed stacking strategy in which two co-founders who are unmarried, childless brothers would gift QSBS to 18 different trusts. If effective, the total excluded gain would equal $300 million, as each of the two brothers and 18 trusts would claim their own $15 million per-issuer cap.
Under current law, well-structured stacking strategies appear safe. The statute explicitly provides that donees of gifted QSBS step into the donor’s shoes and may claim their own per-issuer cap. In the absence of new regulations, the government’s options fall into two categories: common-law doctrines developed outside the QSBS context, and the existing rule on multiple trusts under reg. section 1.643(f)-1. Neither is adequate.
Treasury should promulgate new regulations that would allow the IRS to more effectively attack abusive stacking strategies that use nongrantor trusts. While the Loper Bright case reduced the deference that courts give regulations, section 1202(k) specifically commands that Treasury “shall prescribe such regulations as may be appropriate to carry out the purposes of this section, including regulations to prevent the avoidance of the purposes of this section through split-ups, shell corporations, partnerships, or otherwise.” Congress imposed the $15 million per-issuer cap presumably for a good reason. Trust-stacking strategies circumvent the purpose of the $15 million per-issuer cap by effectively multiplying it. The only limitations are the tax planner’s ingenuity and the constraints imposed by the existing weak rule on multiple trusts. For these reasons, it seems clear that Treasury is authorized to address abusive stacking strategies by issuing new regulations.
Another regulatory approach would be to attack stacking as an anti-conduit problem. Regs could be modeled on the Treasury regulations addressing conduit financing arrangements: reg. section 1.881-3. Those regulations address a different problem (the use of intermediate entities to reduce withholding taxes on payments to foreign persons), but the analytical framework translates naturally to QSBS stacking.
