Introduction
On July 4, 2025, the federal government enacted the One Big Beautiful Bill Act (OBBBA), introducing major updates to the tax treatment of Qualified Small Business Stock (QSBS) under Section 1202 of the Internal Revenue Code.
If you’re a founder, early employee, or investor in a C corporation, these changes could have a meaningful impact on how you plan for exits, fundraising, or your long-term tax strategy. Below is a quick breakdown of what is changing and what it means for you.
Quick Refresher: QSBS Before OBBBA
Under the prior rule, Section 1202 allowed shareholders to exclude up to 100% of capital gain on the sale of QSBS, subject to these limitations:
- The company had to be a C corporation with gross assets not exceeding $50 million at the time of stock issuance.
- Stock had to be acquired at original issuance (not purchased on the secondary market).
- The company had to meet the “active business” test (generally 80% or more of assets used in qualified trades or businesses – not service businesses).
- A minimum five-year holding period was required.
- The gain exclusion was capped at the greater of $10 million or 10x the shareholder’s basis in the QSBS.
QSBS has long been a powerful tax incentive – not just for investors but for startup founders themselves. However, the original rules provided limited flexibility for those seeking earlier exits or companies experiencing rapid growth.
Key QSBS Changes Under OBBBA (for stock issued after July 4, 2025)
- Tiered Holding Periods with Graduated ExclusionsHolding Period Percentage of Gain Excluded
3 years 50%
4 years 75%
5+ years 100% - Higher Qualified Gross Asset Cap
Before: $50 million
After: $75 million, indexed for inflationThis makes it easier for companies to raise larger rounds or continue scaling without immediately losing QSBS eligibility. - Increased Gain Exclusions Cap
Before: Greater of $10 M or 10X basis
After: Greater of $15M (indexed) or 10X basisThis update increases the overall potential benefit, especially for low-basis founders and early employees. - Effective Date
QSBS issued after July 4, 2025 will follow the new OBBBA rules. Stock issued on or before July 4, 2025 remains subject to the existing Section 1202 framework.
What This Means for You
The new rules make QSBS even more valuable – but also more complex. Whether you’re raising a new round, considering an exit, or planning employee stock allocations, now is the time to revisit your company’s QSBS status and make sure your planning reflects the new framework.
Conclusion
While the core QSBS rules still apply, OBBBA introduces some important updates by increasing eligibility, boosting benefit ceilings, and introducing holding period flexibility. Taken together, these changes are likely to start impacting the start up ecosystem almost immediately.
About the Authors: Mital Makadia and Katherine Hart are attorneys with the corporate practice at Grellas Shah LLP. They have provided strategic advice and representation to hundreds of technology ventures, founders, and investors in financing, M&A, and other corporate, commercial, and intellectual property transactions. They can be reached at mm@grellas.com and kh@grellas.com.