On July 4, 2025, President Donald Trump signed into law the One Big Beautiful Bill Act (often called the "Big Beautiful Bill"). Among its many provisions, the Act makes sweeping changes to Section 1202 of the Internal Revenue Code, which governs Qualified Small Business Stock (QSBS) and has long provided tax‑advantaged exits for startup founders, employees and early‑stage investors. These changes apply to QSBS acquired on or after July 4, 2025; stock issued before that date remains subject to the old rules.

Shorter Holding Periods, Graduated Exclusions

Prior law required shareholders to hold QSBS for more than five years to exclude up to 100 % of the gain on a sale. The Big Beautiful Bill introduces a tiered exclusion schedule. Depending on how long an investor holds the stock, different percentages of gain can be excluded:

• 3‑year holding period – 50 % exclusion: Stock held for at least three years but less than four years now qualifies for a 50 % capital‑gain exclusion. This change gives investors earlier liquidity options without losing all tax benefits.
• 4‑year holding period – 75 % exclusion: Stock held for at least four years but less than five years allows a 75 % exclusion.
• 5 years or more – 100 % exclusion: A full 100 % exclusion continues to apply to stock held five or more years.

This graduated structure rewards long‑term investment while allowing partial exclusions for earlier exits. Any gain not excluded under the three‑ or four‑year rules is generally taxed at the 28 % capital‑gains rate rather than the 20 % rate applied to normal capital gains.

Increased Cap on Excludable Gain

The maximum amount of gain that can be excluded per issuer has been raised. Under prior law, taxpayers could exclude gain up to $10 million or 10 × the adjusted basis of the stock. The Big Beautiful Bill increases the flat cap to $15 million for QSBS acquired after July 4, 2025, and provides annual inflation adjustments starting in 2027. The alternative cap of 10 × basis remains available. This higher cap allows founders, employees and investors to shelter more gains when their companies achieve significant growth.

Expanded Company Eligibility: Higher Asset Threshold

The Act also broadens which companies can issue QSBS. Previously, a corporation’s aggregate gross assets could not exceed $50 million at any time before or immediately after the issuance of QSBS. The Big Beautiful Bill raises this threshold to $75 million, with annual inflation adjustments. By increasing the asset limit, the Act brings late‑stage and growth‑stage startups—those receiving larger venture‑capital rounds or pursuing acquisitions—into the scope of QSBS eligibility.

Why This Matters for Founders, Investors, and Employees

These changes make QSBS more attractive for a broader range of stakeholders:

• Founders and executives gain greater flexibility in planning exits and estate‑planning strategies. A shorter holding period with partial exclusions allows for earlier liquidity events while still offering meaningful tax relief.
• Angel and venture investors can deploy capital into startups with the knowledge that a partial exclusion is available after just three years, potentially increasing returns and investment velocity. The higher per‑issuer cap also allows larger gains to be sheltered from federal tax.
• Employees and service providers who receive stock or options as compensation now have a clearer path toward tax‑advantaged gains. With a tiered exclusion schedule and a higher cap, stock‑based compensation becomes more valuable.
• Later‑stage startups that previously exceeded the $50 million asset threshold may now qualify as QSBS issuers, expanding access to capital and incentivizing growth.

While the Big Beautiful Bill represents a significant federal‑tax victory, it is important to remember that some states do not conform to Section 1202. Investors and founders in California, New Jersey and a handful of other states may still face state‑level capital‑gains tax on QSBS, so careful state‑tax planning remains essential.

Looking Ahead

The Big Beautiful Bill delivers the most substantial upgrade to QSBS in more than a decade. By shortening the holding period, raising the excludable gain cap, and expanding the asset threshold, the Act encourages innovation, entrepreneurship and long‑term investment in small businesses. Founders, investors, early‑stage employees and service providers should reevaluate their equity and exit strategies to take full advantage of these new rules. As always, consultation with tax and legal advisors is critical to navigate the nuances of QSBS and to coordinate federal and state planning.

Disclaimer: This blog post is for general informational purposes and does not constitute legal or tax advice. Consult your legal and tax advisors regarding specific situations.

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