On July 4, 2025, President Trump signed into law the One Big Beautiful Bill Act (the “Act”), introducing significant reforms to federal tax law including taxpayer-friendly updates to the Qualified Small Business Stock (QSBS) rules under Section 1202 of the Internal Revenue Code.
These changes aim to modernize QSBS incentives by expanding eligibility, increasing tax exclusions, and offering new benefits for shorter holding periods.
This article outlines the key updates and their impact on investors and startup stakeholders.
Key Highlights of the Act
1. New Holding Period Exemptions
While the full 100% capital gain exclusion for QSBS held at least five years remains intact, the Act introduces partial exemptions for qualified stock acquired after the Signing Date (July 4, 2025) and sold before the five-year mark:
- After 3 Years:
– 50% gain exclusion
– Remaining gain taxed at 28% + 3.8% Medicare surtax
– Effective tax rate: 15.9% - After 4 Years:
– 75% gain exclusion
– Remaining gain taxed at the same combined rate
– Effective tax rate: 7.95%
This change provides earlier liquidity opportunities while preserving meaningful tax savings for long-term investors.
2. Increased QSBS Exclusion Limits
Previously, taxpayers could exclude the greater of:
- $10 million in gains per business (lifetime), or
- 10× the adjusted basis of QSBS sold in the current year.
Under the Act, for QSBS acquired after July 4, 2025, the $10 million limit is increased to $15 million, and it will now be indexed for inflation, ensuring the benefit keeps pace with economic growth.
3. Expanded Gross Asset Threshold for Issuing QSBS
The Act also raises the aggregate gross asset cap for corporations eligible to issue QSBS from $50 million to $75 million, also indexed for inflation going forward. This expansion allows a broader range of high-growth companies to offer QSBS benefits to early investors and employees.
Transitional Rules and Grandfathering
- Stock issued on or before July 4, 2025, remains subject to the previous rules:
– Five-year holding period
– $10M exclusion cap
– $50M gross asset limit - Stock received after the Signing Date in a tax-free exchange for QSBS issued prior to or on the Signing Date will also be governed by pre-Act rules.
Takeaways
The One Big Beautiful Bill Act represents a significant win for early-stage investors, entrepreneurs, and employees by modernizing and expanding the benefits of QSBS treatment. The Act’s enhancements:
- Improve access to capital
- Reward long-term investment
- Offset inflationary pressures
- Offer more flexibility through tiered holding periods
These changes may have a meaningful impact on planning strategies for founders, angel investors, and venture capital funds.
Need guidance?
For more information about how these changes affect your portfolio or company, contact us.