Short answer: Section 1202 now has two regimes, and the dividing line is July 4, 2025. Stock acquired after that date gets a tiered exclusion — 50% at three years, 75% at four, 100% at five — a $15 million per-issuer cap, and a $75 million gross-assets ceiling for the issuing company. Stock acquired on or before July 4, 2025 keeps the old rules: five years, all or nothing, $10 million, $50 million. Which side of that date your shares fall on decides almost everything.
Two regimes, one date
The One Big Beautiful Bill Act (Pub. L. 119-21) did not replace the qualified small business stock rules. It added a second set alongside them. The “applicable date” is the enactment date, July 4, 2025, and the new rules reach stock acquired after that date — July 5, 2025 or later.
| Acquired on or before July 4, 2025 | Acquired after July 4, 2025 | |
|---|---|---|
| Holding period | More than 5 years, all or nothing | 3 years → 50%, 4 years → 75%, 5 years → 100% |
| Per-issuer cap | $10 million | $15 million, indexed after 2026 |
| Issuer gross assets ceiling | $50 million | $75 million |
| Code | §1202(a)(1)(A), (b)(2), (b)(4)(A) | §1202(a)(1)(B), (a)(5), (b)(4)(B), (d)(1) |
A founder who incorporated in 2023 and a founder who incorporated in 2026 are now playing different games with the same statute. If you hold both — original founder shares plus a later round — you are running both sets at once.
The tiered exclusion, and what it costs to leave early
Section 1202(a)(5) sets the applicable percentage: 50% of eligible gain at three years, 75% at four, 100% at five or more. The obvious reading is that a three-year exit is now viable. The arithmetic is less generous than that sounds.
The portion not excluded because of the applicable percentage is taxed at the special 28% rate under §1(h)(4)(A)(ii) — not the 20% long-term capital gain rate — and that taxable portion can also carry the 3.8% net investment income tax. So on $10 million of eligible gain:
| Exit at | Excluded | Taxable | Federal tax at 28% + 3.8% |
|---|---|---|---|
| 3 years | $5,000,000 | $5,000,000 | about $1,590,000 |
| 4 years | $7,500,000 | $2,500,000 | about $795,000 |
| 5 years | $10,000,000 | $0 | $0 |
Waiting from year four to year five is worth roughly $795,000 on these numbers. That is a real number to put in front of a board weighing an offer in month 47.
One nuance worth keeping straight: the 28% rate attaches to gain excluded-out by the applicable percentage. Gain that is taxable because it exceeded the per-issuer limitation is a different category and is not swept into that rule.
The $15 million cap, and the trap inside it
Section 1202(b)(4)(B) raises the per-issuer dollar cap to $15 million for post-July 4, 2025 stock, reduced by prior eligible gain and by current-year eligible gain from stock of the same issuer acquired on or before the applicable date. The figure is indexed for tax years beginning after 2026, rounded to the nearest $10,000, under §1202(b)(5).
Here is the part that surprises people: once your post-July 4, 2025 eligible gain from an issuer exceeds the applicable dollar limit, the applicable dollar limit for that issuer is zero in later years — later inflation increases do not reopen it. You do not get to harvest a rising cap across multiple sale years for the same company.
The alternative cap is unchanged and is often the bigger one for a funded company: §1202(b)(1)(B) allows ten times the aggregate adjusted basis of that issuer’s QSBS you dispose of during the year, with basis determined without regard to post-issuance additions. A founder who contributed $4 million of property gets a $40 million ceiling, not $15 million.
The $75 million gross-assets ceiling
To be a qualified small business, the corporation’s aggregate gross assets must not exceed the threshold at all times before the issuance and immediately after it, counting the amounts received in that issuance. For stock issued after July 4, 2025 the threshold is $75 million (§1202(d)(1)); for stock issued before July 5, 2025 it remains $50 million.
“Immediately after” is the operative phrase in a financing. A company at $70 million of gross assets raising $10 million fails the test for the shares issued in that round — even though it passed the moment before. The shares issued earlier are unaffected; QSBS status is tested share by share, at issuance.
The $75 million figure was meant to be indexed for tax years beginning after 2026. Be aware that a drafting error placed the indexing rule in a second subsection (b)(4) rather than under (d), so treat the indexing as unsettled until it is corrected or clarified.
What did not change
The eligibility requirements are where QSBS claims actually fail, and OBBBA left them alone:
- C corporation, original issuance. You must acquire the stock at original issue from a domestic C corporation, for money, property other than stock, or services provided to the corporation (§1202(c)(1)). Buying founder shares from another shareholder does not produce QSBS.
- 80% by value, active business. During substantially all of your holding period, at least 80% of the corporation’s assets by value must be used in the active conduct of a qualified trade or business (§1202(c)(2)(A)). A company sitting on a large cash pile from a raise can fail this.
- Excluded businesses. Health, law, engineering, architecture, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage, any business whose principal asset is the reputation or skill of its employees, plus banking, insurance, financing, leasing, investing, farming, extraction, and hotels, motels and restaurants (§1202(e)(3)). DISCs, RICs, REITs, REMICs and cooperatives are ineligible issuers (§1202(e)(4)).
- Redemption rules. Stock is disqualified if the corporation bought stock from you or a related person during the four-year period beginning two years before issuance, and separately if the corporation made significant redemptions — more than 5% of aggregate stock value — during the two-year period beginning one year before issuance (§1202(c)(3)). Transactions treated as redemptions under §304(a) count. This is the rule that quietly kills QSBS in companies that buy back departing founders’ shares.
- The §1045 rollover. Still available: a noncorporate taxpayer can roll gain from QSBS held more than six months into replacement QSBS purchased within 60 days of the sale, to the extent proceeds do not exceed the cost of the replacement stock.
If you are an LLC or an S corporation
Neither one issues QSBS. Section 1202(c)(1) requires stock in a C corporation, so S corporation stock does not qualify at all, and an LLC taxed as a partnership does not issue stock — unless it elects to be taxed as a C corporation.
Converting an LLC into a C corporation can start the QSBS clock, but on terms most founders misread:
- The holding period starts at conversion. Stock acquired in exchange for property is treated as acquired on the date of the exchange (§1202(i)(1)(A)). Your years operating as an LLC do not count.
- Basis is at least the fair market value of what you contributed (§1202(i)(1)(B)). Practically, that means only post-conversion appreciation is eligible for exclusion — and that same fair market value becomes the base for the ten-times-basis cap.
So converting a business that has already built substantial value does not retroactively shelter that value; it draws a line and shelters what comes after. That is still often worth doing, but it is a different decision from the one founders think they are making. For owners weighing S corporation status instead, our note on S corporation reasonable compensation covers the payroll side of that trade-off.
If a partnership holds QSBS, the owner-level exclusion under §1202(g) generally requires that you held the partnership interest for the entire period the partnership held the stock. And §1202(h) can preserve original-issuance and holding-period treatment when a partnership distributes QSBS to a partner who was a partner when the stock was acquired and at all times since.
Frequently asked questions
Do the new rules apply to shares I already owned before July 2025
No. The tiered exclusion, the $15 million cap and the $75 million gross-assets ceiling apply only to stock acquired after July 4, 2025. Earlier shares stay under the more-than-five-years rule with the $10 million cap and the $50 million ceiling.
Is excluded QSBS gain subject to the 3.8% net investment income tax
No. The net investment income tax reaches only the portion of gain included in income, so fully excluded gain is outside it. The taxable portion under a 50% or 75% exclusion can be subject to it.
Is QSBS gain an alternative minimum tax preference item
For stock acquired after September 27, 2010, no. Excluded §1202 gain is not an AMT preference item under §57(a)(7) as amended.
I am not a U.S. person. Can I hold QSBS
Yes. Section 1202 does not impose a residency or citizenship test on the shareholder — the requirements run to the issuing corporation, which must be a domestic C corporation. The practical questions for a non-U.S. founder are different ones: whether the gain is taxable in the United States at all, and how the Turkey–U.S. treaty allocates it. That analysis should happen before an exit is structured, not after.
Where this leaves you
QSBS is the largest single tax benefit available to a U.S. startup founder, and it is also the one most often lost on a technicality that was avoidable at formation: a buyback, an LLC left unconverted a year too long, a financing that crossed the gross-assets line. The rules reward companies that decide their structure early and document it.
If you are forming a company, converting one, or approaching an exit and want to know which side of July 4, 2025 your shares sit on and what that is worth, talk to us. Our 2026 year-end planning guide covers the rest of the calendar.
