New Jersey to Allow Exclusion of Qualified Small Business Stock Gains

On June 30, 2025, New Jersey Governor Phil Murphy signed into law Bill A4455/S4503. The bill brings the state into conformity with IRC Sec. 1202 for tax years beginning on or after January 1, 2026. 

IRC Sec. 1202 excludes capital gains from the sale of qualified small business stock (QSBS), within certain limits, from federal income. New Jersey is one of a handful of states that do not use either federal adjusted gross income or taxable income as a starting point for individual income taxation. Therefore, until the bill’s recent passage, resident stockholders with capital gains from the sale of QSBS were subject to New Jersey gross income tax on the gains.

IRC Sec. 1202 allows eligible shareholders of QSBS to exclude 50% to 100% of capital gains upon the sale of QSBS, provided the stock and taxpayer meet all of the criteria. The provision allows eligible taxpayers to exclude the greater of $15 million ($10 million if the stock was issued on or before July 4, 2025) or up to ten times the taxpayer’s basis in the QSBS sold.

The new law offers private equity and venture capital investors in New Jersey a unique opportunity to enhance after-tax returns and investment flexibility. New Jersey’s favorable legislative change on IRC Sec. 1202 was part of an effort to encourage investment and stimulate economic growth in the state. This change now allows stockholders to benefit from this lucrative tax provision. If you have questions about how you can take advantage of the recent changes to IRC Sec. 1202, contact us below.