What the 2025 Law Changed About QSBS

The One Big Beautiful Bill Act (OBBBA), signed July 4, 2025, expanded Section 1202 QSBS in three concrete ways: a higher eligible-gain dollar limit, a higher gross-assets ceiling, and earlier partial exclusions. The 100% exclusion was already permanent — the PATH Act of 2015 locked it in for acquisitions after September 27, 2010 — so OBBBA did not rescue it from a sunset. What changed is how large the benefit can be and how soon a partial exclusion can apply for later acquisitions.

This post is the before-and-after of those QSBS changes, plus one worked example. It is not a full eligibility treatise. For company and shareholder requirements, see The Complete Guide to QSBS (Section 1202). For the file you should keep, see the QSBS records playbook.

What changed

Three expansions matter for planning:

• Higher eligible-gain dollar limit for stock with a statutory acquisition after July 4, 2025 — generally a $15 million starting dollar component (indexed beginning 2027), still compared with the 10× basis alternative.
• Higher gross-assets ceiling for stock issued after that date — $75 million instead of $50 million (the $75 million figure is also indexed beginning 2027).
• Earlier partial exclusions for those later acquisitions — 50% after at least three years, 75% after at least four, and 100% after at least five, instead of the older more-than-five-year cliff for earlier acquisitions.

Keep the controlling dates separate. They are not interchangeable, and they need not be the same share-by-share.

• Statutory acquisition date — after holding-period tacking under §1202(a)(6) and the §1223 cross-reference — generally selects the eligible-gain dollar limit and the exclusion schedule.
• Issuance date generally selects the aggregate gross-assets ceiling ($50 million vs. $75 million).

Do not treat “issued after July 4, 2025” as automatically selecting the new acquisition regime. Issuance picks the ceiling; acquisition (after tacking) picks the dollar limit and exclusion tiers. Gift, inheritance, and certain partnership-distribution transfers can preserve QSBS character while shifting whose acquisition date and limit apply — those facts need a tranche-level review, not a headline date.

Reaching a holding-period milestone alone does not establish eligibility. Domestic C-corporation status, original issuance or a permitted transfer, the gross-assets tests at the required times, active-business and qualified-trade-or-business rules during substantially all of the holding period, and redemption history still have to be satisfied. Documentation organizes evidence; it does not create qualification.

Before and after

Qualifications (read once; they apply to the table above).

• The §1202(b) eligible-gain limit is the gain taken into account before the exclusion percentage is applied. On a 50% tier with a $15 million applicable limit, the excluded amount is $7.5 million — not $15 million.
• The 10× basis figure is an alternative to the applicable dollar amount, not an add-on ceiling. Compare the two; take the greater; then apply the percentage.
• Prior use of the same issuer’s limit, and mixed-vintage coordination under §1202(b)(4), can reduce what remains available. A taxpayer does not get a separate $10 million allowance and a separate $15 million allowance against the same issuer.
• Only the $15 million and $75 million amounts are indexed beginning in 2027; the 10× multiplier is not.
• The gross-assets measure is a statutory asset test (with predecessor and parent-subsidiary aggregation), not enterprise valuation. Later growth after a qualifying issuance does not by itself disqualify previously qualifying stock; a prior breach of the applicable ceiling is not cured by shrinking assets before a later issuance.
• At the 50% and 75% tiers, the included portion of eligible gain faces a maximum 28% federal rate under §1(h) where that category applies. Gain above the applicable limit stays in the regular long-term capital-gains category (0%, 15%, or 20%). The 3.8% net investment income tax may apply to either taxable portion; excluded gain stays outside NIIT.

Worked example

A 50% exclusion tier (sold after at least three years but less than four). Assumptions for this illustration under current law:

• Noncorporate taxpayer
• The stock otherwise qualifies as QSBS (company and shareholder requirements met)
• Statutory acquisition after July 4, 2025
• Sold after at least three years but less than four (50% tier)
• $20 million realized gain
• $100,000 qualifying basis in the shares disposed of during the year
• No prior use of this issuer’s limit; no other adjustments

Step 1 — eligible-gain limit first. Greater of $15 million or 10 × $100,000 (= $1 million) = $15 million of eligible gain taken into account. The remaining $5 million sits above the limit.

Step 2 — then apply the 50% exclusion to that $15 million of eligible gain:

• (a) Excluded: $7.5 million
• (b) Taxable within the limit because the exclusion is only 50%: $7.5 million — maximum 28% category under §1(h) where applicable
• (c) Above the limit: $5 million — regular long-term capital-gains rates (0/15/20)

Arithmetic check: $7.5M + $7.5M + $5M = $20M. NIIT may apply to the taxable portions; the excluded $7.5 million stays out.

If the same stock were instead held at least four years but less than five (75% tier), still under current law and still assuming continued qualification: of the $15 million eligible gain, $11.25 million would be excluded and $3.75 million would remain taxable within the limit (again in the max-28% category where §1(h) applies), with the same $5 million above the limit at regular LTCG rates. At five years and 100%, the full $15 million of eligible gain would be excluded, and the $5 million above the limit would still be regular LTCG. Those later-year figures are illustrations under current law — not promises that waiting alone finishes the analysis.

State tax

Federal QSBS qualification does not determine every state’s treatment of the same gain. Some states conform; some do not; some have proposed or considered decoupling. Residency and sourcing still matter for amounts that are not excluded federally. Use the 2026 QSBS state-by-state conformity guide rather than assuming the federal result carries through automatically.

Checklist

1. Identify the relevant dates for each tranche — statutory acquisition (after tacking) for the dollar limit and exclusion schedule; issuance for the gross-assets ceiling.
2. Verify company and shareholder eligibility — domestic C corporation, original issuance or a permitted transfer, active-business and redemption rules, holder-level requirements. A QSBS eligibility checklist is a starting point, not a substitute for the facts.
3. Model the available limit and exclusion percentage — dollar vs. 10× basis; prior use and §1202(b)(4) coordination across vintages of the same issuer; then the percentage for the actual holding period.
4. Check state treatment for the residency and tax year that will apply — see the conformity guide linked above.
5. Preserve supporting records — issuance and ledger, acquisition dates and tacking, basis, historical and immediately-after gross assets, active-business evidence across the hold, redemption history, and prior use of the issuer-level limit. Records support a claim; they do not create qualification. The records playbook walks through the file categories.

Joe Wallin is a Seattle-based startup attorney at Carney Badley Spellman. He writes The Startup Law Blog.

Nothing in this post is legal or tax advice. Reading this post does not create an attorney-client relationship. Consult qualified counsel about your specific facts.