The One Big Beautiful Bill Act (OBBBA), signed July 4, 2025, enhances the federal tax exclusion for Qualified Small Business Stock (QSBS) under IRC §1202. The new law retains the classic 100% exclusion after a five-year hold and introduces additional methods and flexibility to exclude gains from stock acquired after July 4, 2025.

Quick refresher: What is QSBS?

QSBS is stock in a domestic C-corporation that meets the §1202 rules (original-issue purchase, active business test, and an asset-size limit at issuance). Non-corporate sellers (individuals, certain trusts/estates, and partners via pass-throughs) may exclude eligible gain at sale, subject to the greater of a per-issuer dollar cap or a “10× basis” cap.

What changed under OBBBA

For stock acquired after July 4, 2025

The enhanced Qualified Small Business Stock (QSBS) provisions introduce a tiered exclusion system, allowing investors to exclude 50% of gains after three years, 75% after four years, and 100% after five years, with shorter holding periods also applicable. The per-issuer dollar cap has increased from $10 million to $15 million ($7.5 million for married filing separately) and will be indexed for inflation starting in 2027. Moreover, the gross assets limit for issuers has risen to $75 million, expanding access for more startups and growth companies.

These changes apply only to stock acquired after July 4, 2025; existing QSBS retains the previous rules. The existing exclusions for specific trades/businesses, original issuance requirements, and redemptions near issuance remain unchanged. Standard tacking rules under §1223 apply, preventing the reset of holding periods by exchanging older QSBS for new shares. Section 1045 rollovers continue to be allowed for reinvesting taxable gains into new QSBS within 60 days.

Conclusion 

The OBBBA does not completely overhaul the Qualified Small Business Stock (QSBS) provisions; instead, it expands access and adds flexibility. The new regulations include tiered exclusions for earlier exits, a larger cap per issuer, and a higher asset ceiling. These changes will enable more founders and investors to benefit, provided the stock is newly acquired after July 4, 2025, and the existing §1202 rules are adhered to. It’s important to keep meticulous records, separate the lots acquired before and after the effective date, and model the caps before making any sales.

Contact Us Today

Understanding how the new QSBS rules apply to your situation is key to capturing the full tax advantages. Call us at 203-489-0612 to review your options and safeguard your benefits.

Written by: Cristian Carlos