A Quiet Change With Loud Exit Implications: Proposed Washington SB 6229 and QSBS

For many founders, early employees, and early investors, qualified small business stock (QSBS) has long been viewed as one of the most valuable, and least visible, tax benefits tied to building a successful company.

A proposed Washington bill, Senate Bill 6229, is a reminder that those benefits are not always as automatic as they seem, particularly at the state level.

What QSBS Is (and Why People Care)

QSBS is a federal tax incentive designed to encourage investment in early-stage U.S. businesses.

At a high level, QSBS allows eligible taxpayers to exclude a significant portion (and in some cases up to 100%) of the gain from federal capital gains tax when they sell shares in a qualifying small business, assuming certain requirements are met.

For founders and early employees, QSBS can materially change the economics of an exit. For investors, it can significantly improve after-tax returns.

Core QSBS Requirements (Simplified)

Note on recent changes: In July 2025, the One Big Beautiful Bill Act amended several federal QSBS rules under Section 1202 of the U.S. Internal Revenue Code. For QSBS acquired after July 4, 2025, these changes expanded eligibility and increased potential benefits, as described below.

QSBS eligibility is technical, but the most common qualifiers include:

• C-corporation Shares
  The issuing company must be a U.S. C-corporation. LLCs and S-corps do not qualify.

• Original issuance
  The shares generally must be acquired directly from the company (not purchased secondhand), including through founder issuance, early employee equity, or primary investment rounds.

• Company size at issuance
  The company’s gross assets generally must not exceed $50 million at the time the shares are issued, although for QSBS acquired after July 4, 2025, this threshold increased to $75 million (with inflation indexing).

• Active business requirement
  The company must use at least 80% of its assets in an active trade or business. Certain industries are excluded.

• Holding period
  The shares must typically be held for at least five years to qualify for the full federal exclusion, although for QSBS acquired after July 4, 2025, partial federal exclusions may be available after shorter holding periods.

Because QSBS eligibility is determined at issuance and over time, many companies and individuals assume that if they “check the boxes” early, the benefit will be there at exit.

What Washington SB 6229 Would Change

Washington’s capital gains tax currently starts with federal net long-term capital gains as its baseline. Because QSBS gains are excluded from federal income under Section 1202 of the U.S. Internal Revenue Code, those gains have generally not been included when calculating capital gains tax at the state level in Washington.

SB 6229 would change that approach.

If enacted, the bill would require taxpayers to add back QSBS gains that were excluded federally when calculating Washington’s capital gains tax. In plain terms, this means gains that may be fully tax-free at the federal level could still be subject to Washington’s capital gains tax.

The proposal would apply to gains recognized on or after January 1, 2026.

Who Should Be Paying Attention

This proposal is particularly relevant for:

• founders holding C-corporation shares,

• early employees with equity compensation,

• angel investors and early-stage investors,

• companies planning for a potential liquidity event in the coming years.

Even when an exit feels distant, this is a reminder that long-term outcomes are shaped by decisions made much earlier.

What This Does Not Mean

It’s important to keep perspective.

SB 6229 does not eliminate QSBS at the federal level. It does not invalidate prior planning. And it does not mean that every exit will suddenly face higher taxes.

What it does underscore is that state tax treatment does not always track federal rules, and those differences often surface late in the lifecycle, when flexibility is limited.

Practical Takeaways for Founders and Operators

Rather than reacting to any single bill, this is a good opportunity to focus on fundamentals:

• Revisit assumptions embedded in equity and exit planning.

• Confirm that entity structure decisions still align with long-term goals.

• Coordinate legal, tax, and business planning instead of treating them as separate silos.

• Periodically stress-test how changes in law could affect a future transaction.

These conversations are far easier, and often far less expensive, when they happen early.

The Bigger Picture

Issues like SB 6229 rarely appear on a cap table or in a term sheet. They tend to surface later, often during diligence, when the stakes are higher and options are narrower.

This is exactly why many growing companies benefit from ongoing, practical legal support that looks ahead rather than reacting at the finish line.

If you have questions about how QSBS, state tax changes, or equity planning intersect for your business, it’s worth addressing them sooner rather than later. Feel free to reach out.

LetsGo@cruxterra.com