The Section 1202 exclusion is an LP-level number built from fund-level facts: who the LP is, what qualifies, and the per-issuer cap.
Yes, if the LP is a taxable individual (or a trust or estate), it was already a partner when the fund bought the shares, and the fund held qualifying shares for more than five years: the Section 1202 exclusion passes through the partnership. In an illustrative fund returning 2.50x before tax, with 70 per cent of the gain qualifying, it lifts a US individual LP's after-tax multiple from 2.14x to 2.39x and the after-tax IRR from 12.0 to 13.9 per cent, worth the same as a fund returning 2.83x without it.
Worked in full in Venture Capital by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
Venture managers mention QSBS in every fundraise and almost never put a number on it. The number depends on three things the LP can check: who the LP is, how much of the fund's gain actually qualifies, and whether the LP's share of one winner breaks the per-issuer cap.
| Input | Value |
|---|---|
| Commitment, fully called in years 0 to 3 | $10m |
| Net distributions, years 5 to 10 | $25m |
| Net gain | $15m |
| Federal rate on long-term gains: 20% plus 3.8% NIIT | 23.8% |
| Share of the gain that is QSBS held over five years | 70% |
| Per-issuer cap | $10m |
Distributions of 1, 2, 4, 6, 7 and 5 million arrive in years 5 to 10. For simplicity every distribution is treated as 60 per cent gain, the fund-level ratio of $15m to $25m. In practice the gain comes company by company, but the totals are the same.
Tax = gain × 23.8% = $15m × 23.8% = $3.57m
Net to the LP = $25m − $3.57m = $21.43m, an after-tax multiple of 2.14x and an after-tax IRR of 12.0 per cent (14.7 per cent before tax).
Qualifying gain = $15m × 70% = $10.5m, excluded entirely
Taxable gain = $4.5m; tax = $4.5m × 23.8% = $1.07m
Net to the LP = $23.93m, an after-tax multiple of 2.39x and an IRR of 13.9 per cent.
Without QSBS, what pre-tax multiple leaves $23.93m after tax?
(($23.93m − $10m) ÷ (1 − 23.8%) + $10m) ÷ $10m = 2.83x
Excel, with net in B1 and paid-in in B2: =((B1-B2)/(1-0.238)+B2)/B2
The exclusion saves $2.50 million of tax on a $10 million commitment: 0.25x of after-tax multiple and 1.9 points of IRR. Measured the way an LP compares funds, it is worth 0.33x of pre-tax performance.
The qualifying share is the variable managers state most loosely. Secondary purchases, exits before year five, and late-stage rounds bought above the asset test all reduce it.
| Share of gain qualifying | Tax, $m | After-tax multiple | After-tax IRR |
|---|---|---|---|
| 0% | 3.57 | 2.14x | 12.0% |
| 25% | 2.68 | 2.23x | 12.7% |
| 50% | 1.78 | 2.32x | 13.4% |
| 70% | 1.07 | 2.39x | 13.9% |
| 100% | 0.00 | 2.50x | 14.7% |
| Pre-tax multiple | Pre-tax IRR | After tax, no QSBS | After tax, QSBS | Tax saved, $m |
|---|---|---|---|---|
| 1.5x | 6.2% | 1.38x / 4.9% | 1.46x / 5.8% | 0.83 |
| 2.5x | 14.7% | 2.14x / 12.0% | 2.39x / 13.9% | 2.50 |
| 4.0x | 23.1% | 3.29x / 19.5% | 3.79x / 22.1% | 5.00 |
The exclusion is a share of the gain, so it is worth most in the funds that need it least. In a 1.5x fund it adds 0.08x.
Venture gains are concentrated, and the cap applies per company, per taxpayer. Suppose one winner produces 60 per cent of the LP's gain and the LP's share of the fund's cost in that company was 3 per cent of its paid-in capital.
| LP commitment | $10m | $30m |
|---|---|---|
| Total gain | 15.0 | 45.0 |
| Qualifying gain | 10.5 | 31.5 |
| Gain from the winner | 9.0 | 27.0 |
| Ten times basis in the winner | 3.0 | 9.0 |
| Winner gain above the $10m cap | 0.0 | 17.0 |
| Gain excluded | 10.5 | 14.5 |
| Tax saved, $m | 2.50 | 3.45 |
The $30 million LP saves $3.45 million, not the $7.50 million a pro rata reading of the $10 million case suggests. Only 46 per cent of its qualifying gain is excluded. Large individual LPs should model the cap on the fund's likely winners, not on the fund as a whole, and take advice on their own position.
QSBS is a real part of the return a taxable LP earns, worth 0.08x to 0.50x of after-tax multiple across the cases above, but it is an LP-level number built from fund-level facts: holding periods, original issuance and concentration. Ask the manager for the qualifying share of realised gains, then run it alongside the fee and carry arithmetic in what IRR a 3x venture fund actually earns. The fund model behind the book's own case is in the free workbooks for Venture Capital. This is an illustration, not tax advice.
A non-corporate LP can, because the partnership passes the Section 1202 gain through, provided the LP already held its interest when the fund bought the shares and the fund held them more than five years. In the illustrative case that excludes $10.5m of a $15m gain, saving $2.50m of federal tax on a $10m commitment. Tax-exempt and corporate LPs get no benefit.
Generally yes: the cap of the greater of $10m or ten times basis (for shares issued before July 2025) is applied per taxpayer and per issuer, so each LP tests its own share of each company's gain. A $30m LP whose share of one winner's gain is $27m, against ten times basis of $9.0m, has $17.0m above the cap and excludes $14.5m of its $31.5m qualifying gain.
It depends on the qualifying share of gains and the fund's outcome. With 70 per cent qualifying, it adds 1.9 points to a 2.5x fund's after-tax IRR, from 12.0 to 13.9 per cent, and 2.6 points in a 4.0x fund, from 19.5 to 22.1 per cent. In a 1.5x fund the gain is small and so is the benefit: 0.08x.
This article is one calculation from Venture Capital. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
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