The Default Outcome: Pay the Tax
Default treatment of a business sale or large stock sale: capital gains tax on the gain (sale price minus basis). For long-term holdings (over one year), federal rate is 0%/15%/20% depending on income. Add 3.8% NIIT for high earners. Add state income tax (0-13.3%). Total federal-plus-state can range from 23.8% to 37%+.
Concrete example: a founder with $200K basis selling for $5M. Long-term capital gain: $4.8M. Federal LTCG (20% top rate): $960K. NIIT (3.8% on $4.8M): $182K. California state tax (13.3% on $4.8M): $638K. Total: $1.78M of tax — roughly 35.6% of gross proceeds. The seller keeps $3.22M.
Without planning, this is the outcome. Many founders accept this as inevitable and move on. But the strategies below can reduce that $1.78M by hundreds of thousands or even eliminate it entirely depending on the specifics.
Timing matters enormously. The year of sale determines the bracket structure, NIIT exposure, IRMAA brackets, and state tax. A multi-million-dollar sale in a high-income state in a high-earnings year stacks every disadvantage. Splitting the sale across years (where possible) flattens the impact.
QSBS Section 1202: Up to $10M Tax-Free
Qualified Small Business Stock (QSBS) under Section 1202 is the most valuable single provision available to founders and early employees of qualifying C-corps. Up to $10 million of capital gain (or 10x basis, whichever is greater) can be excluded from federal capital gains tax — entirely tax-free.
Requirements: stock must be issued by a domestic C-corporation, the corporation must have less than $50M in gross assets at the time of issuance, the corporation must be in a 'qualified trade or business' (most tech/biotech qualifies; financial services, performing arts, hospitality typically don't), and the holder must have acquired at original issuance (not from a secondary buyer) and held for more than 5 years.
Excluded gain example: a founder with $100K basis sells QSBS for $8M after 6 years. Gain: $7.9M. The first $10M is excluded (within the cap), so the entire $7.9M is federal-tax-free. Federal saving: $1.5M+ at 20% LTCG plus NIIT.
Stacking strategy: gifts of QSBS to family members or trusts can multiply the per-person $10M exclusion. A founder gifting QSBS to spouse + 2 children + 1 trust can potentially capture 4 separate $10M exclusions on the same company sale. This 'QSBS stacking' is legal but heavily scrutinized — must be done well in advance of a known sale (suggested 1-3 years prior) and structured properly.
State conformity varies. California, Pennsylvania, and Mississippi don't conform to QSBS — state tax still applies on the entire gain. New York generally conforms. Most other states conform. Check your specific state.
Installment Sale Strategy
Section 453 installment sale: instead of receiving full proceeds at closing, accept payment over multiple years. You recognize gain as payments are received, spreading the tax across years.
Concrete example: $5M sale in 2026 at 20% LTCG = $1M tax in 2026. Instead, structure as $1M down + 4 annual payments of $1M. Tax recognition: $200K per year for 5 years. Combined with the time value of money ($800K of deferred tax compounding at 5% = $94K of investment return), the seller comes out meaningfully ahead.
Risks: buyer creditworthiness. If the buyer defaults, the seller may lose remaining principal. Many sellers require collateral, personal guarantees, or escrow holdbacks to mitigate. Selling to private equity is generally safer than selling to an individual or small company.
Installment sales must be structured at fair-market interest rates. The IRS imputed interest rules require minimum interest charged on installment notes. As of 2026, the AFR (Applicable Federal Rate) for long-term installment notes is around 4.5-5%. Rates above this are fine; rates below trigger imputed interest gain.
Limitation: installment sales don't apply to publicly-traded stock. Only privately-held businesses or non-public stock qualify. For employees with public-company RSUs, installment sale isn't an option.
Opportunity Zone Investments
Qualified Opportunity Zones (QOZs) provide three tax benefits: deferral of original gain until 2026 sale (now passed for some), reduction of original gain by 10-15% if held long enough, and tax-free appreciation if held 10+ years.
Original gain deferral: invest the proceeds (or just the gain portion) into a Qualified Opportunity Fund within 180 days of sale. The original gain is deferred until the QOF investment is sold or December 31, 2026 (whichever comes first).
Basis step-up: held for 5 years, basis increases by 10%. Held for 7 years, basis increases by 15% (so only 85% of original gain is recognized). The 7-year benefit is now mostly past unless invested by 2019.
10-year hold: the appreciation in the Opportunity Fund itself is entirely tax-free if held more than 10 years. So if you invest $1M of gain into a QOF and it grows to $4M over 10 years, the $3M of QOF appreciation is tax-free at sale.
Practical use: most appropriate for sellers willing to invest in real estate or business ventures in designated opportunity zones for 10+ years. The 'gain' is deferral plus permanent exclusion of QOF appreciation. Not appropriate for sellers wanting liquid cash from the sale.
Caveats: QOF investments are typically illiquid (real estate development funds, private business funds). Substantial-improvement requirements force capital deployment into the underlying business or property. Verify the fund qualifies and follows compliance rules.
Charitable Remainder Trust (CRT)
A Charitable Remainder Trust (CRT) is an irrevocable trust that pays you (or named beneficiaries) income for a term of years or for life, with the remainder going to charity. Tax benefits: immediate charitable deduction, no capital gains on contributed assets, ongoing income stream.
Mechanics: contribute appreciated stock or business interests to a CRT before sale. The CRT sells them tax-free (charities are tax-exempt). You receive a charitable deduction equal to the present value of the remainder interest passing to charity. The trust pays you income (typically 5-7% of trust value annually) for the term.
Concrete example: $5M of appreciated stock contributed to a 20-year CRUT (Charitable Remainder Unitrust) paying 6%. Sale proceeds (after no capital gains tax): $5M. Annual payment to you: 6% of trust value, varying with investment performance. Estimated 20-year cumulative payments: $5M-$8M+ depending on investments. Charitable deduction: present value of remainder, typically $1M-$2M depending on assumptions.
Trade-offs: you lose access to the principal forever (it goes to charity at term end). You receive income but not the underlying assets. CRTs are best for those with charitable intent who would have given some portion to charity anyway, AND who want income from a low-basis, hard-to-sell asset.
The income from the CRT is taxed under specific rules: ordinary income first, then capital gains, then tax-exempt income, then return of principal. Most CRT income ends up taxed as long-term capital gains given the underlying capital-gain assets — typically a tax savings vs. ordinary income rates.
Charitable Gift Annuity
A Charitable Gift Annuity (CGA) is a contract between you and a charity: you contribute appreciated assets, the charity pays you a fixed annual payment for life (or term), and at your death any remainder belongs to the charity. Simpler than a CRT but less flexible.
Mechanics: donate $500K of appreciated stock to a CGA. The charity sells (tax-free) and invests proceeds. You receive a partial charitable deduction (the gift portion above the annuity value). The charity pays you 4-7% per year for life (rate depends on age — older = higher rate).
Capital gains treatment: you recognize a portion of the capital gain as ordinary income spread over your life expectancy, rather than all in one year. For a 65-year-old, this might spread over 20 years — with 5% recognized annually rather than 100% in year of contribution.
Best for: smaller gift amounts ($25K-$1M typically), donors over 60, donors who value simplicity over flexibility. Charities offer standardized CGA rates set by the American Council on Gift Annuities, so there's no negotiation.
Compared to CRT: simpler administration (charity handles everything), lower setup costs, fixed payment (vs. CRT's variable). But less flexibility on payment timing, beneficiaries, and term length.
Tactical Considerations for Concentrated Stock
Founder/exec stock concentration is its own challenge. Holding $5M of one company's stock creates massive idiosyncratic risk. The standard advice: diversify. But selling triggers the tax bill above. The optimization is reducing tax cost while diversifying.
Charitable bunching with appreciated stock: donate the appreciated portion of your sale proceeds (or contribute pre-sale), getting the charitable deduction at fair market value while avoiding capital gains.
Hedging strategies (covered calls, collars, prepaid forwards): these defer or reduce tax consequences while locking in some downside protection. Complex; require careful structure. The 'constructive sale' rules (Section 1259) require care — overly aggressive hedging can be reclassified as a sale.
Exchange Funds (Section 1259): contribute concentrated stock to a fund holding diversified positions; receive shares in the diversified pool. No capital gains recognized at contribution. Hold for 7+ years to qualify. After 7 years, you can withdraw your share of the diversified pool tax-free.
Death and stepped-up basis: ultimate tax-free outcome. If you die holding the appreciated stock, your heirs receive stepped-up basis (eliminating all unrealized gain). The 'never sell' strategy works for some. Combined with diversification through borrowing-against-stock (rather than selling), wealth can grow tax-free across generations.