How the 2025 Act Reshapes QSBS Federal Tax Benefits
By David Lim, CPA, Tax Senior
Qualified Small Business Stock (QSBS) is one of the most powerful tax incentives for founders, early employees and investors in U.S. startups. Governed by Section 1202 of the Internal Revenue Code, this provision allows eligible non-corporate taxpayers (specifically individuals, trusts and estates) to exclude significant capital gains from federal income tax. To qualify, these taxpayers must acquire stock directly from a qualifying domestic C-corporation at its original issuance – subject to certain asset thresholds – and satisfy specific holding period requirements.
On July 4, 2025, the tax landscape shifted with the passage of the One Big Beautiful Bill Act (OBBBA). Among numerous changes, this legislation updated Section 1202 to introduce a tiered gain-exclusion framework, rewarding earlier exits and modernizing long-standing thresholds to better reflect today’s faster-moving startup lifecycle.
Comparison: The Legacy Framework vs. The OBBBA Era
The primary distinctions between the Pre-OBBBA and Post-OBBBA rules include increased holding period flexibility, a larger per-issuer gain cap for new stock and expanded asset thresholds for eligible corporations.
- The Pre-OBBBA Rules (Legacy Stock)
For stock acquired on or before July 4, 2025, the traditional 5-year holding period requirement still applies.
Eligibility for gain exclusion depends on the date of acquisition:
- 100% exclusion: Stock acquired Sept. 28, 2010 – July 4, 2025
- 75% gain exclusion: Stock acquired Feb. 18, 2009 – Sept. 27, 2010
- 50% gain exclusion: Stock acquired Aug. 11, 1993 – Feb. 17, 2009
Key Limitation: Under these legacy rules, selling before the 5-year holding period results in a 0% exclusion, meaning the entire gain becomes taxable. Additionally, the gain eligible for exclusion is capped at the greater of $10 million or 10X the taxpayer’s basis. The gross asset limit for the corporation at the time of issuance remains $50 million.
- The OBBBA Rules (Stock Issued After July 4, 2025)
For stock issued after the Act’s effective date, the OBBBA introduces tiered exclusions and higher financial thresholds:
- Tiered exclusions:
- 50% gain exclusion after a 3-year holding period
- 75% gain exclusion after a 4-year holding period
- 100% gain exclusion after a 5-year holding period
- Increased caps and thresholds:
- Per-issuer gain cap: Increased to $15 million, while keeping the 10x basis cap retained
- Gross Asset limit: Increased from $50 million to $75 million
- Inflation Indexing: Beginning in 2027, both the $15M gain cap and $75M asset limit will be indexed for inflation annually
- Important nuance:
- If the taxpayer sells post-OBBBA QSBS at the 3-year or 4-year mark, the excluded portion may be significant—but the non-excluded portion is subject to a higher 28% capital gain rate (rather than the standard 15%/20% long-term capital gain rates). Taxpayers may also need to consider the potential application of the 3.8% net investment income tax (NIIT).
QSBS Quick Reference Table
| QSBS Acquisition Date | Holding Period | Exclusion % | Gain Cap (Per Issuer) | Gross Asset Limit |
|---|---|---|---|---|
| Aug. 11, 1993 - Feb. 17, 2009 | 5+ Years | 50% | $10 Million | $50 Million |
| Feb. 18, 2009 - Sept. 27, 2010 | 5+ Years | 75% | $10 Million | $50 Million |
| Sept. 28, 2010 - July 4, 2025 | 5+ Years | 100% | $10 Million | $50 Million |
| Post-July 4, 2025 | 3 Years | 50% | $15 Million* | $75 Million* |
| Post-July 4, 2025 | 4 Years | 75% | $15 Million* | $75 Million* |
| Post-July 4, 2025 | 5 Years | 100$ | $15 Million* | $75 Million* |
*Note: Indexed for inflation beginning in 2027
Strategic Implications for the Ecosystem
- For Founders and Investors: Earlier Liquidity
The OBBBA’s 3-year and 4-year tiers allow for earlier secondary sales or M&A exits without losing all tax benefits. This flexibility is a significant shift from the previous all-or-nothing 5-year requirement.
- For Growth-Stage Companies: Increased Access to Capital
Raising the gross‑asset threshold from $50M to $75M enables more mature or capital‑intensive startups to qualify for QSBS treatment, potentially widening investor interest.
Key Requirements Remaining in Place
Despite these enhancements, the OBBBA does not modify the core requirements for QSBS eligibility. These include:
- The company must be a domestic C-corporation. Stock must be acquired at original issue (directly from the corporation or through an underwriter) in exchange for money, property (not stock) or as compensation for services.
- At least 80% of assets must be used in the active conduct of a qualified trade or business.
- Excluded industries still include professional services (such as law, health or engineering), banking, farming and hospitality.
- Stock buybacks or redemptions: Certain repurchases around the issuance period can disqualify the stock from QSBS treatment.
Bottom Line
The OBBBA strengthens Section 1202 by making QSBS more adaptable to today’s investment environment. While the 5‑year, 100% gain exclusion remains the most advantageous target, the new intermediate tiers offer valuable flexibility for earlier liquidity events.
If you are anticipating a liquidity event in the next 12–24 months, now is an ideal time to revisit your QSBS planning.
Please contact us to learn how we can help you maximize the benefits of these new rules.
Sources: IRS’s One, Big, Beautiful Bill provisions, ASL’s Section 1202 Offers Attractive Tax Treatment for Capital Gains on Qualified Small Business Stock, The One, Big, Beautiful Bill Act
