The Qualified Small Business Stock (QSBS) regime under Section 1202 of the Internal Revenue Code has long been a cornerstone of tax planning for founders, early employees, and investors in startup companies. But until now, its full potential was often undercut by strict eligibility limits, an inflexible five-year holding period, and capped exclusions that hadn’t budged since the 1990s.
That all changed on July 4, 2025, when the One Big Beautiful Bill Act (OBBBA) was signed into law. The new legislation marks the most significant overhaul of QSBS in over a decade—offering earlier liquidity, broader eligibility, and higher tax exclusion ceilings for new investors.
Let’s break down what’s changed, what stays the same, and how you can optimize your equity strategy under the new rules.
What Changed Under the OBBBA?
The OBBBA modernizes QSBS treatment for stock issued on or after July 5, 2025. Key changes include:
- Shortened holding periods for partial gain exclusion,
- Increased gain exclusion cap from $10 million to $15 million (plus inflation adjustments), and
- Expanded eligibility for issuers, increasing the gross asset limit from $50M to $75M (adjusted for inflation after 2026)
For legacy stock issued prior to July 5, 2025, the original QSBS rules continue to apply.
QSBS Before vs. After the OBBBA
| Provision | Pre-OBBBA (Stock Issued ≤ July 4, 2025) | Post-OBBBA (Stock Issued ≥ July 5, 2025) |
| Gain Exclusion % | 50%, 75%, or 100% (based on acquisition date) | 50% (3 years), 75% (4 years), 100% (5+ years) |
| Holding Period | 5 years minimum for any exclusion | Minimum 3 years for partial exclusion |
| Per-Taxpayer Cap | Greater of $10M or 10x basis | Greater of $15M or 10x basis (indexed after 2026) |
| Gross Asset Limit for Issuer | $50M | $75M (indexed after 2026) |
| AMT Preference on Exclusion | 7% AMT add-back on older stock exclusions | No AMT preference for post-OBBBA stock |
| Foreign QSBS Treatment | Not eligible for exclusion | Still excluded—domestic stock only |
More Flexibility, But Also More Complexity
While the new QSBS regime offers greater flexibility, it also introduces technical questions—particularly around how the exclusion limit applies in combination with the new tiered structure.
For example, a taxpayer selling $40 million in QSBS after three years may face very different tax liabilities depending on how the $15 million cap is interpreted (before vs. after applying the exclusion percentage). Early interpretations suggest that applying the percentage first—then limiting the amount—yields the most favorable outcome. But no formal IRS guidance has confirmed this, leaving some ambiguity.
Also, any includible gain on sale of QSBS with a less than five-year holding period is subject to a 28% Federal capital gains rate – which is 8% to 13% higher than the standard capital gains rate of 20% or 15%, respectively.
Strategic Implications for Founders and Investors
These changes aren’t just cosmetic. They represent a rethinking of how growth-stage investment is rewarded—and demand a reevaluation of your equity and liquidity strategy. Key takeaways:
- Faster Liquidity, Still Preferential Treatment: The new 3- and 4-year partial exclusions mean you don’t have to wait five years to benefit. This can accelerate exit planning or unlock value in secondary sales.
- Higher Gain Caps: The $15 million cap (with inflation adjustments) increases the headroom for tax-free gains—especially valuable for founders and early employees with low-basis shares.
- More Eligible Companies: With the asset threshold now at $75 million, many previously disqualified growth-stage or late-round startups may now issue QSBS.
- Planning Still Required: For taxpayers holding both pre- and post-OBBBA QSBS, the order of sales can dramatically affect exclusion opportunities. In most cases, selling pre-OBBBA shares first helps preserve future benefits.
Don’t Forget State Tax Planning
While the federal tax rules have improved, not all states conform to Section 1202. States like California, and Pennsylvania continue to fully tax QSBS gains. For high-stakes exits, the difference can run into seven figures.
Our Perspective
At Aura Advisors, we view the OBBBA not just as legislative relief—but as a signal. Lawmakers are increasingly incentivizing long-term, domestic innovation by reducing tax barriers to equity ownership. If you’re a founder, investor, or early-stage employee, the opportunity to reshape your strategy is now. From structuring equity grants to evaluating exit timing, planning around QSBS is no longer optional—it’s essential.
For more information about the OBBA, check out the following:
- How the One Big Beautiful Bill Act Reshapes Business Tax Strategy in 2025 and Beyond
- Understanding the One Big Beautiful Bill Act: What It Means for Individual Taxpayers
- Section 174 Capitalization Relief Is Here: How the OBBA Affects R&E Tax Strategy
Aura Advisors is a boutique tax consulting and compliance firm working with start-ups, emerging growth companies, and affluent individuals. Making it safer for good people and good companies to continue to do good things.