The One Big Beautiful Bill Act, signed July 4, 2025, delivered the biggest change to the qualified small business stock exclusion in more than a decade. As Mintz detailed this week, Section 1202 now offers a tiered exclusion that begins after three years, a $15 million cap per issuer and a $75 million gross asset ceiling for the company issuing the stock. The upgrades apply only to stock issued or acquired after July 4, 2025.
What changed
| Feature | Stock acquired on or before July 4, 2025 | Stock acquired after July 4, 2025 |
|---|---|---|
| Minimum holding period | More than five years | Three years |
| Gain excluded | 100% after five years | 50% at three years, 75% at four, 100% at five |
| Per-issuer cap | Greater of $10 million or 10 times basis | Greater of $15 million or 10 times basis |
| Company gross assets at issuance | $50 million | $75 million |
The $15 million cap and $75 million threshold are indexed for inflation beginning in 2027. The rest of the framework is unchanged: the issuer must be a domestic C corporation meeting active business requirements, shareholders generally must acquire stock at original issuance, and businesses in fields such as health, law, consulting and financial services remain ineligible, as Grant Thornton outlines.
Who is affected
Founders, early employees who buy or receive shares, and angel investors in companies raising capital now stand to gain the most. Companies that had outgrown the $50 million test can again issue qualifying stock until they cross $75 million. Mintz notes that restored bonus depreciation and immediate expensing of domestic research costs may help some companies stay under the new threshold.
There are limits. Shares acquired on or before July 4 keep the old $10 million cap even if sold later, and carryover holding-period rules generally prevent holders from exchanging old stock for new shares to reset into the better regime. Davis Wright Tremaine adds that California, Alabama, Mississippi and Pennsylvania do not conform to the federal exclusion, Hawaii and Massachusetts conform only partially, and New Jersey will allow it beginning in 2026. In those states, gain that is tax-free federally may still be taxed.
The after-tax math
The portion of gain that is not excluded on an early sale is taxed at the 28% rate that applies to Section 1202 gain, plus the 3.8% net investment income tax. That works out to an effective federal rate of 15.9% on a three-year sale and 7.95% on a four-year sale, according to Mintz. The illustration assumes $10 million of gain on post-July 4 stock, within the cap, and compares a sale before three years taxed at the 23.8% top long-term rate cited by The Budget Lab at Yale.
| Holding period at sale | Gain excluded | Federal tax | Effective rate |
|---|---|---|---|
| More than one year, under three | $0 | $2,380,000 | 23.8% |
| Three years | $5,000,000 | $1,590,000 | 15.9% |
| Four years | $7,500,000 | $795,000 | 7.95% |
| Five years or more | $10,000,000 | $0 | 0% |
Example: a founder who sells in year four keeps about $9.2 million of a $10 million gain after federal tax. Before the new law, the same sale short of five years would have received no exclusion and kept about $7.6 million.
For larger exits, the higher cap is the bigger lever. A five-year holder with $15 million of gain on new stock can exclude all of it. The same gain on stock acquired before July 5, assuming 10 times basis is lower than $10 million, excludes $10 million and leaves $5 million taxable, about $1.19 million at 23.8%.
Moves to discuss with your advisor
Practitioners point to several planning questions. Founders and investors may consider the timing of new share issuances so stock lands under the new regime, and they will need records showing which lots were acquired before and after July 5, since one holder can own both. Davis Wright Tremaine highlights growing interest in gifts to family members or non-grantor trusts in no-income-tax states, which may multiply the per-taxpayer cap and reduce state tax, while cautioning that such structures draw scrutiny. Each involves technical requirements worth reviewing with tax counsel.
What to watch
Watch for IRS guidance on the new holding-period tiers and on how the indexed cap applies to shareholders with mixed pre- and post-enactment lots, and for state legislatures deciding whether to conform to the federal changes.
Sources
- First reported QSBS Benefits Expanded Under One Big Beautiful Bill Act — Mintz
- QSBS Just Got a Major Upgrade — Davis Wright Tremaine
- Explaining enhanced Section 1202 benefits — Grant Thornton
- Increases to the Federal Estate and Gift Tax Exemption Under the OBBBA — Arnold & Porter
- Who Would Benefit from Eliminating Capital Gains Taxes on Home Sales? — The Budget Lab at Yale
After TAX is an independent publication. Articles are general information, not tax, legal or investment advice. Consult a licensed professional about your situation.
