QSBS in Maryland: Rolling Conformity, 6.5% + 2% Capital Gains Surtax, and What NIH Biotech, Fort Meade Cybersecurity, and DC-Metro Founders Need to Know

Maryland's rolling conformity to Section 1202: what it means for Maryland founders

Maryland uses rolling conformity to the Internal Revenue Code for personal income tax purposes — the state's income tax statute incorporates the IRC "as amended from time to time" rather than adopting it as of a fixed historical date. When Congress amends a federal tax provision, the change flows automatically into Maryland law unless the Maryland General Assembly specifically decouples.¹

For §1202 purposes, Maryland's rolling conformity means:

• The OBBBA's §1202 enhancements — the $15M exclusion cap (up from $10M), the tiered 3/4/5-year exclusion schedule (50/75/100% for post-July 4, 2025 stock), and the $75M gross assets threshold (up from $50M) — applied in Maryland automatically when OBBBA was enacted on July 4, 2025, without any Maryland legislative action.
• Maryland has not decoupled from §1202. HB 801 (2026 session) would have required a Maryland addition modification for §1202-excluded gains, but the Finance Committee recommended the bill unfavorably and it did not advance. As of October 2026, the full §1202 exclusion applies at the Maryland level.
• If Congress further amends §1202 in the future, those changes will also flow into Maryland law automatically — unless the General Assembly specifically decouples from them.

This is in contrast to California, which repealed its §1202 conformity statute in 2013 and taxes the full §1202-excluded gain at rates up to 13.3% — regardless of the federal exclusion. It is also in contrast to Oregon, where SB 1507 (April 2026) decoupled from §1202 entirely, effective retroactively to January 1, 2026. Maryland has taken neither of those steps. Its rolling conformity mechanism is the default: adopt federal changes unless the General Assembly explicitly opts out. The General Assembly has not opted out of §1202 — though the 2026 legislative session made clear that some members intend to try again.

Maryland's conformity position is more favorable than Massachusetts for post-OBBBA stock. Massachusetts uses a static IRC reference date of January 1, 2024, which predates OBBBA's July 2025 enactment — meaning the $15M cap and tiered holding schedule may not automatically apply at the state level for Massachusetts residents holding post-July 2025 stock. Maryland's rolling conformity picks up OBBBA automatically, without a Massachusetts-style gap. See the Massachusetts QSBS guide for the MA-specific analysis and the OBBBA QSBS guide for the full pre/post comparison.

Maryland's 2026 tax rate structure: 6.5% state + 2% capital gains surtax + county piggyback

Maryland taxes capital gains as ordinary income — there is no preferential long-term capital gains rate at the state level. Capital gains are subject to Maryland's progressive income tax brackets plus a 2% capital gains surtax for high-income filers, plus mandatory county piggyback income taxes.²

Maryland's 2026 state income tax brackets for single filers, as amended by the 2025 Budget Reconciliation and Financing Act:

For a startup founder with a large QSBS exit — $5M, $10M, or $15M — virtually the entire gain falls into the top 6.5% bracket, since the $1M threshold is crossed almost immediately. The blended-rate effect of lower brackets on a $15M gain is minimal: the effective state marginal rate on nearly all of a $15M gain is 6.5%.

The 2% Maryland capital gains surtax

The 2025 Budget Reconciliation and Financing Act added a separate 2% tax on net capital gains for Maryland filers whose federal AGI exceeds $350,000. This is a distinct levy from the income tax brackets above — it applies in addition to the state income tax, not instead of it.³

For a founder with a $15M non-QSBS capital gain, the surtax adds 2% to the effective Maryland rate on that gain (since federal AGI would far exceed $350K). For a founder whose gain qualifies under §1202 and is excluded from federal AGI, the surtax does not apply — because the excluded gain is not in federal AGI, and federal AGI is the threshold metric. The §1202 exclusion thus eliminates both the income tax and the capital gains surtax simultaneously.

County piggyback income taxes

Every Maryland county and Baltimore City levies a mandatory local income tax (the "piggyback" tax) on top of the state rate. Local taxes are assessed on Maryland taxable income, using the same tax base, and are collected with the state income tax on the same return. County rates for 2026:

The piggyback tax is based on where you live, not where you work. A Montgomery County resident working in DC owes the 3.2% Montgomery County piggyback tax on their capital gains. A Baltimore City resident who works in Howard County owes the 3.2% Baltimore City rate. Remote employees who live in Frederick but commute to Rockville owe the 2.96% Frederick County rate.

What §1202 saves Maryland founders

On a fully qualifying §1202 exit, all Maryland taxes are eliminated — state income tax, capital gains surtax, and county piggyback:

• Pre-OBBBA: $10M qualifying exit (5-yr hold, $50K basis): Maryland savings = ($10M × 6.5%) + ($10M × 2%) + ($10M × 3.2%) = $650K + $200K + $320K = $1,170,000 (Montgomery County)
• Post-OBBBA: $15M qualifying exit (5-yr hold): Maryland savings = ($15M × 6.5%) + ($15M × 2%) + ($15M × 3.2%) = $975K + $300K + $480K = $1,755,000 (Montgomery County)

These amounts stack on top of the federal tax eliminated by the §1202 exclusion. Federal LTCG at 20% plus NIIT at 3.8% on a fully excluded $15M gain eliminates approximately $3,570,000 in federal tax at the five-year mark. The combined federal-plus-Maryland benefit on a $15M post-OBBBA qualifying exit exceeds $5.3 million in total tax eliminated for a Maryland-domiciled founder — one of the higher combined federal-plus-state QSBS benefits among conforming states, driven by the new 2025 tax increases.

NIH and FDA biotech corridor: the §1202(e)(3)(A) health exclusion analysis

The Maryland I-270 Technology Corridor — stretching from Bethesda through Rockville, Gaithersburg, and Frederick — is one of the largest biotech and life sciences clusters in the United States, anchored by the National Institutes of Health (Bethesda), the U.S. Food and Drug Administration (Silver Spring/White Oak), and the National Institute of Standards and Technology (Gaithersburg). Baltimore adds the Johns Hopkins Technology Ventures ecosystem and the University of Maryland commercialization programs. Maryland-based life sciences founders need to understand one foundational §1202 rule that is often misunderstood: the §1202(e)(3)(A) health exclusion is not a bar on health-related businesses — it is a bar on personal health service businesses.

IRC §1202(e)(3)(A) excludes businesses "in the field of health" — specifically those whose principal asset is "the reputation or skill of 1 or more of its employees." The statutory language targets clinical care delivery, not technology companies that serve the health sector.

Maryland biotech and pharma R&D: generally qualified

Life sciences companies that conduct research, development, and manufacturing — rather than directly delivering clinical care to patients — are generally not excluded under §1202(e)(3)(A):

• Pharmaceutical and biopharmaceutical R&D companies: Companies discovering and developing drug candidates — small molecules, biologics, vaccines — where the company's principal asset is its pipeline, IP, and scientific platform. A preclinical-stage Rockville pharma company's principal asset is its drug candidates and research data, not the clinical skills of physicians rendering care to patients. Companies following the model of NIH-adjacent spinoffs (where IP is licensed from NIH and developed into commercial therapeutics) are generally in the pharmaceutical technology field, not the health services field.
• Medical device and diagnostic device developers: Companies designing and manufacturing FDA-cleared medical devices — surgical instruments, imaging systems, implantable devices, diagnostic platforms — are primarily technology and manufacturing businesses. Their principal assets are proprietary device IP, manufacturing processes, and regulatory clearances, not the clinical skills of employees caring for patients.
• Contract research organizations (CROs) — partial analysis: A CRO that manages clinical trial logistics, data management, protocol design, and regulatory submissions for pharmaceutical sponsors is providing research and project management services. If the CRO's employees are primarily scientists, project managers, and regulatory affairs professionals — not licensed clinicians delivering patient care — the §1202(e)(3)(A) analysis is generally favorable. If the CRO employs physicians who provide clinical care to trial participants as part of the protocol, the health-field exclusion risk increases. A written §1202(e)(3) opinion from qualified tax counsel is recommended for CRO founders before planning around the exclusion.
• Health IT and software platforms: Companies that build software for electronic health records, revenue cycle management, prior authorization automation, clinical decision support, population health analytics, or healthcare data interoperability — where the company sells a software product and its employees are primarily engineers and data scientists, not clinicians — are generally in the software and technology field. The company's principal asset is its technology, not the health skill of employee clinicians delivering care.
• Digital therapeutics (DTx): FDA-cleared prescription digital therapeutics that deliver evidence-based behavioral interventions through software — where the therapeutic effect comes from the software algorithm, not from licensed clinicians — are generally in the technology field for §1202 purposes.

Health services businesses: excluded

Maryland healthcare companies that deliver clinical care as their primary business are excluded under §1202(e)(3)(A), regardless of the technology they use:

• Physician practice management groups, hospital systems, and physician staffing companies — their principal asset is the clinical skill of their physician employees. The size of the practice and the sophistication of their practice management software do not change the character of the business.
• Telehealth companies that directly employ licensed clinicians to provide remote patient care — where the company's revenue is generated by clinician-patient encounters — are in the health field. This distinguishes them from telehealth infrastructure companies (which sell software to healthcare organizations) or digital therapeutics companies (which deliver software-based therapeutic interventions).
• Mental health platforms that staff licensed therapists and counselors for one-on-one patient sessions — where the company's value is in its clinician network and the care they provide — are in the health services field even if the platform is technologically sophisticated.

Fort Meade corridor and defense tech: the §1202(e)(3) consulting exclusion analysis

Anne Arundel County — home to Fort Meade, NSA headquarters, and U.S. Cyber Command — has a dense concentration of cybersecurity and defense technology companies. Montgomery County and the DC suburbs more broadly host thousands of government contractors and technology companies serving federal agencies. This creates a significant §1202(e)(3) excluded-industry risk that is often overlooked by founders who assume "tech company" automatically means "QSBS-eligible."

IRC §1202(e)(3)(A) excludes businesses in the field of "consulting" — specifically where the business's principal asset is the skill of its employees. Government IT contractors and cybersecurity companies may fall into this exclusion depending on what they actually do.

Technology product and platform companies: generally qualified

• Cybersecurity software and product companies: Companies that develop, sell, and maintain security software products — endpoint detection and response (EDR) platforms, SIEM systems, vulnerability scanning tools, zero-trust network access platforms — where revenue is from software licenses, SaaS subscriptions, or product sales. The company's principal asset is its software IP, not the personal consulting skill of individual employees. Product companies whose solutions work at scale without requiring individualized expert engagement for each customer are generally not in the consulting field.
• Defense technology hardware and systems: Companies developing proprietary hardware — sensors, radio systems, autonomous platforms, satellite components — where the value is in the engineered system, not in advisory services delivered by key technical employees.
• Cybersecurity platform companies with government customers: A software company whose product happens to be sold primarily to DOD or intelligence agencies is still a software company. The government customer base doesn't determine the qualified-trade-or-business status; the nature of the company's product or service does.

Professional services and consulting firms: excluded

• Government IT consulting firms whose primary delivery is labor hours — staff augmentation, embedded technical advisors, advisory contracts priced on time-and-materials — are in the consulting field regardless of the sophistication of their employees' expertise. If the company's primary revenue comes from placing skilled people on contract engagements (rather than selling a product or recurring software service), the §1202(e)(3)(A) consulting exclusion applies.
• Managed security services providers (MSSPs) that primarily provide staffed monitoring, incident response, and advisory services on a per-engagement or retainer basis — rather than an automated software platform — face heightened §1202(e)(3)(A) risk depending on the revenue structure.
• Cleared defense contractor holding companies and professional services firms that compete on technical staff qualifications (relevant for cleared positions) are likely in the consulting field under §1202(e)(3)(A), even if they have technology components.

The line between "technology company with government customers" and "professional services firm with sophisticated tools" is not always obvious in the defense-tech ecosystem. Founders should obtain a written §1202(e)(3) legal opinion — particularly given that the gross assets timing test under §1202(d) may also be relevant for early-funded defense tech companies that receive large SBIR/STTR grants. See the excluded industries guide for the complete §1202(e)(3) statutory framework.

Montgomery County fintech and financial technology: the §1202(e)(3)(B) analysis

Montgomery County and the broader DC metro area have a growing financial technology ecosystem — payments infrastructure, regulatory technology, lending platforms, and investment management software companies. The §1202(e)(3)(B) excluded-industry analysis for this sector turns on whether the company performs financial services or sells technology to companies that do.

IRC §1202(e)(3)(B) excludes businesses "in the field of banking, insurance, financing, leasing, investing, or similar financial services."

Software and technology companies: generally qualified

• Payments and transaction processing software companies that license APIs or SaaS platforms to financial institutions — where the company's revenue is software fees and it does not itself hold customer funds or take on credit risk — are generally in the technology field.
• Regulatory technology (regtech) companies that sell KYC, AML, OFAC, and compliance automation software to financial institutions — where the company sells software subscriptions, not regulatory compliance advisory services — are generally not in the financial services field.
• Government financial technology companies that build grant management, benefits disbursement, or treasury management platforms for federal and state agencies — where the company sells software to public sector clients, not financial services to consumers — are generally in the software field.

Financial services businesses: excluded

• Online lenders and marketplace lending platforms that originate and hold loans on their own balance sheet — earning interest income and carrying credit risk — are in the financing business under §1202(e)(3)(B) even if their technology platform is sophisticated.
• Registered investment advisers and wealth management platforms whose primary revenue is from managing client portfolios or investment advisory fees — even technology-enabled or automated platforms — are in the investing business.
• Mortgage technology companies that include a direct lending component (not just software for other lenders) face §1202(e)(3)(B) risk for the lending revenue stream.

HB 801: Maryland's 2026 decoupling attempt and the legislative risk to monitor

Maryland House Bill 801 (2026 Regular Session) would have required Maryland taxpayers to add back to Maryland taxable income any gain excluded under §1202 from federal gross income — effectively decoupling Maryland from the §1202 exclusion and subjecting QSBS gains to Maryland's full income tax rate (plus the capital gains surtax and county piggyback). The bill was introduced in early 2026 and referred to the House Ways and Means Committee, which scheduled a hearing for February 26, 2026. The Senate Finance Committee recommended the bill unfavorably. HB 801 did not advance to the floor and did not become law.⁴

This risk is different from the California and Oregon situations, where decoupling is already law and certain. Maryland's current law is conforming. But the expressed legislative intent to change that — combined with a state government under fiscal pressure and a top QSBS exclusion cap now at $15M (making each qualifying exit a more significant revenue event for the state) — means Maryland-based founders should treat planning with an appropriate level of urgency, particularly for exits expected in 2027 or later.

Worked examples: Maryland QSBS tax outcomes

Maryland QSBS state comparison: MD vs CA vs NY vs VA vs NJ vs MA

Maryland's combined effective top rate on capital gains (11.7%) is higher than Virginia's and New Jersey's in dollar-per-dollar terms for conforming states, making the §1202 exclusion disproportionately valuable for Maryland-domiciled founders. The neighbor comparison matters: a Montgomery County founder who holds QSBS and qualifies saves $1.755M in state and local taxes; a California founder in the same exit saves $0 at the state level.

Planning priorities for Maryland founders

1. Confirm qualification before your exit horizon. The eight §1202 tests — C corporation status, gross assets under $50M at issuance (or $75M for post-OBBBA stock), active business in a qualifying field, original issuance, holding period, and eligible shareholder — must all be met. Maryland's rolling conformity is only useful if the exclusion actually applies at the federal level. See the qualification requirements guide.
2. Document the §1202(e)(3) qualified trade or business analysis now. If your company is in biotech, cybersecurity, health IT, or fintech — get a written legal opinion from qualified tax counsel before any transaction. Maryland's ecosystem has a high density of companies in the health-field and financial-services gray zones. An undocumented exclusion claim is a liability at the transaction stage.
3. Confirm 83(b) elections and holding period clock start dates. For founders with unvested RSAs or employees with early-exercisable ISOs, the §1202 clock runs from the date of issuance (for RSAs with a timely §83(b) election) or from the date of exercise (for options). A missed 83(b) election can push the clock forward by 1-4 years. See the 83(b) election guide.
4. Consider gifting and trust strategies before the pre-LOI window closes. Under §1202(h)(2), gifts of QSBS to family members and certain trusts preserve QSBS status in the donee's hands and allow additional $15M caps to be used. Gifting must occur before any binding sale commitment — after an LOI is signed, the window to gift QSBS typically closes. See the gifting and stacking guide and the trusts guide.
5. Monitor the 2027 Maryland legislative session. HB 801 failed in 2026, but the revenue arguments for decoupling are the same in 2027. If a decoupling bill advances, Maryland founders who have not yet sold and who hold post-2025 stock with sub-$15M gains will have more to lose from decoupling than under the old $10M cap — given that OBBBA raised the stakes. Engage a Maryland tax attorney to monitor and advise on planning adjustments if decoupling legislation advances.
6. Account for the 2% capital gains surtax in your tax reserve planning. Even if you qualify for the §1202 exclusion and owe $0 Maryland tax, non-QSBS income in the same year (salary, bonus, other capital gains) may trigger the surtax on those gains. Build your tax reserve model to reflect the full Maryland rate stack on any non-excluded proceeds.

Sources

1. Maryland Code, Tax-General Article §10-107 (rolling IRC conformity for Maryland personal income tax); Maryland Department of Assessments and Taxation guidance on IRC conformity.
2. Maryland Budget Reconciliation and Financing Act of 2025; Maryland Comptroller, Withholding Tax Facts January 2026 (documenting new 6.25%/6.5% brackets and county rates); Grant Thornton, Maryland Enacts Major Tax Hikes to Address Budget (June 2025).
3. Maryland Budget Reconciliation and Financing Act of 2025, §2% capital gains surtax provision; Armstrong Fleming & Moore, Maryland Tax Changes: Increases for 2025 and Beyond.
4. Maryland HB 801 (2026 Regular Session), House Ways and Means Committee; Senate Finance Committee unfavorable recommendation; ITEP, Testimony on Decoupling from the QSBS Exclusion Before the Maryland House Ways and Means Committee (Feb. 26, 2026).
5. IRC §1202 (Qualified Small Business Stock); Baker Tilly, Changes to Section 1202 in the One Big Beautiful Bill Act (July 2025); QSBS Expert, Maryland Qualified Small Business Stock and Investor Tax Incentives.

Tax values verified against 2026 sources. Maryland tax law is subject to change; consult a Maryland-licensed tax professional for advice specific to your situation. Content is for informational purposes only and does not constitute financial, tax, or legal advice.

Work with a QSBS advisor who knows Maryland's tax structure

Maryland's combined rate stack — state income tax, capital gains surtax, and county piggyback — makes the §1202 exclusion worth more here than in most conforming states. A specialist can model the full outcome: federal and Maryland taxes, gifting windows, trust strategy, charitable options, and post-exit investment policy.

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