QSBS After the One Big Beautiful Bill Act: The $15 Million Exclusion and the New 3-Year Tier

Section 1202 lets founders and early investors in a C corporation exclude some or all of the gain when they sell qualified small business stock, or QSBS. The One Big Beautiful Bill Act made the break bigger and easier to reach for stock issued after July 4, 2025. If you are forming a company, raising money, or deciding between an LLC and a C corporation, the new rules are worth understanding.

What changed for stock issued after July 4, 2025

• A shorter holding period. You no longer need to hold the stock for five years to get any benefit. The exclusion is 50% after three years, 75% after four years, and 100% after five years.
• A higher cap. The gain you can exclude from one company rises from $10 million to $15 million, or 10 times your basis in the stock if that is larger. The $15 million figure is indexed for inflation starting in 2027.
• Bigger companies qualify. The corporation's gross assets can now be up to $75 million when the stock is issued, up from $50 million, also indexed after 2026.
• No AMT hit. The excluded gain is not an alternative minimum tax preference.

Stock issued on or before July 4, 2025 keeps the old rules: a five-year holding period, the $10 million cap, and the $50 million asset test.

The requirements that still apply

• C corporation only. The company must be a domestic C corporation when the stock is issued and for substantially all of the time you hold it. LLC units and S corporation stock do not qualify.
• Original issuance. You must acquire the stock directly from the company, in exchange for money, property, or services. Stock bought from another shareholder does not qualify.
• Active business. At least 80% of the company's assets must be used in an active trade or business.
• Excluded fields. Many service businesses do not qualify, including health, law, accounting, consulting, financial services, and businesses whose main asset is the skill or reputation of their employees. Hotels, restaurants, farming, and oil and gas also fall outside the rule.

What the numbers can look like

A founder receives stock in a new software company in 2026 with a basis close to zero. In 2031, after five years, the company is acquired and the founder's shares are worth $12 million. The full $12 million gain may be excluded from federal income tax. Without Section 1202, the founder would owe about $2.86 million at the 20% capital gains rate plus the 3.8% net investment income tax.

If the sale happened after only three years instead, half of the gain would be excluded. The taxable half is taxed at a 28% rate, so the planning question becomes whether the extra years are worth the wait.

Planning moves

• Choose the entity with the exit in mind. An LLC is often better while a business is losing money, but it cannot issue QSBS. Converting to a C corporation starts the holding period at conversion, and only gain after that date can qualify. Our entity and startup advisory team models this choice.
• Document qualification each year. Keep records of the asset test at each issuance and of the active business requirement over time. Buyers' lawyers will ask for them.
• Watch redemptions. Buying back stock from founders around the time of a new issuance can disqualify that stock.
• Consider gifting before a sale. Shares given to family members or certain trusts can carry their own $15 million cap, which can multiply the benefit. This needs careful planning with an estate planning advisor.
• Check your state. Some states, such as California, do not follow Section 1202, so state tax may still apply.

Frequently asked questions

Does a SAFE or convertible note count as QSBS?

The holding period generally starts when the instrument converts into stock, not when you invest. The treatment of SAFEs is unsettled, so get advice before relying on an earlier date.

Can I get the new rules for stock I already own?

No. The new tiers, cap, and asset test only apply to stock issued after July 4, 2025. Older stock keeps the old rules.

Is an S corporation ever eligible?

Not while it is an S corporation. Stock in a company that later revokes its S election can qualify, but only for shares issued after it becomes a C corporation.

What if I sell before three years?

You may be able to defer the gain under Section 1045 by rolling the proceeds into other QSBS within 60 days, as long as you held the original stock for more than six months.