QSBS After the 2025 Overhaul: The New Section 1202 Rules

General information, not tax advice for your specific situation. QSBS is highly fact-specific and the rules changed in 2025. Confirm eligibility with your CPA or tax counsel.

Qualified Small Business Stock (QSBS) under Section 1202 can let founders and early investors exclude federal tax on the gain when they sell qualifying C-corporation stock. The 2025 One Big Beautiful Bill Act (OBBBA) made it dramatically more generous for stock acquired after July 4, 2025: gains can now be partially excluded after just three years, the lifetime cap rose to $15 million, and companies up to $75 million in assets can issue it.

Key takeaways

• QSBS can exclude federal capital gains tax on qualifying C-corp stock, historically up to 100%.
• For stock acquired after July 4, 2025, a new tiered holding period applies: 50% exclusion at 3 years, 75% at 4 years, 100% at 5 years.
• The per-issuer exclusion cap rose from $10 million to $15 million (inflation-indexed starting 2027).
• The company asset limit rose from $50 million to $75 million in aggregate gross assets (indexed from 2027).
• Stock issued on or before July 4, 2025 keeps the old rules: flat 5-year hold for 100%, $10M cap, $50M asset limit.
• Core requirements are unchanged: a domestic C-corp, original-issuance stock, an active qualified business, and the asset test at issuance.
• Filing an 83(b) election can start your holding clock at grant: see why below.

What is QSBS / Section 1202?

Section 1202 rewards taking equity risk in small companies. If you acquire stock directly from a qualifying C-corporation and hold it long enough, you can exclude a large share of the gain from federal income tax when you sell. For founders and seed investors, it’s one of the most valuable provisions in the code: a successful exit can be largely or entirely federal-tax-free on the excluded portion. (State treatment varies; California, notably, does not conform.)

What changed in 2025 (OBBBA)?

The OBBBA kept the framework but loosened the three things that most limited it. The changes apply to QSBS acquired after July 4, 2025:

Feature	Old rule (≤ July 4, 2025)	New rule (after July 4, 2025)
Holding period	Flat 5 years for 100%	Tiered: 3 yrs → 50%, 4 yrs → 75%, 5 yrs → 100%
Per-issuer exclusion cap	$10 million	$15 million (indexed from 2027)
Company asset limit	$50 million gross assets	$75 million gross assets (indexed from 2027)

The tiered holding period is the headline: liquidity at year three or four now carries a meaningful exclusion instead of nothing, which better matches real startup timelines.

Who and what qualifies?

The expanded benefits don’t change the core eligibility tests. The stock generally must meet all of these:

Requirement	Detail
Issuer	Domestic C-corporation
Acquisition	Original issuance (from the company, for cash, property, or services), not bought from another holder
Company size	Aggregate gross assets at or below the limit ($75M for post-July-4-2025 stock; $50M before) at and immediately after issuance
Active business	At least 80% of assets used in a qualified active trade or business
Excluded industries	Not a service business in health, law, finance, consulting, etc.; not hospitality, farming, or extraction

Why founders should care, and the 83(b) connection

Your QSBS holding clock starts when you acquire the stock. For founders who buy restricted stock at incorporation and early-exercise options, filing an 83(b) election within 30 days starts that clock at grant rather than at vesting, which can pull your QSBS five-year (or new three/four-year) finish line years earlier. The two filings are deeply linked; we cover the deadline mechanics in the 83(b) election: why 30 days can save you six figures. How your shares are valued and structured also ties back to your 409A valuation.

Old stock vs. new stock

If you already hold QSBS issued on or before July 4, 2025, you stay under the prior regime: the flat five-year hold, the $10M cap, and the $50M asset test. The enhanced tiers, the $15M cap, and the $75M limit apply only to stock acquired after that date. In practice, many cap tables will now have two classes of QSBS with different rules, so tracking acquisition dates carefully matters at exit.

Frequently Asked Questions

What is the QSBS holding period after the 2025 changes? For stock acquired after July 4, 2025, the holding period is tiered: 50% of the gain is excluded at three years, 75% at four years, and 100% at five years. Stock acquired on or before July 4, 2025 keeps the flat five-year requirement for the 100% exclusion.

How much gain can QSBS exclude? For stock acquired after July 4, 2025, the per-issuer cap is the greater of $15 million (up from $10 million, indexed for inflation from 2027) or 10 times your basis. The $10 million cap still applies to earlier stock.

What is the company size limit for QSBS? The issuer’s aggregate gross assets must be at or below $75 million (for stock issued after July 4, 2025) or $50 million (for earlier stock), measured at and immediately after issuance.

Does an 83(b) election affect QSBS? Yes, indirectly. Your QSBS holding clock starts when you acquire the stock, so early-exercising and filing an 83(b) election can start that clock at grant, moving your exclusion finish line earlier.

Does California recognize QSBS? No. California does not conform to Section 1202, so the federal exclusion does not reduce California tax. Plan for state tax on the gain even when the federal portion is excluded.

If you want help confirming QSBS eligibility or planning around the new tiers, book a call.

Anelya Grant is the founder of AG Accounting, an accounting firm serving tech startups and healthcare organizations. She is also co-founder of JustPaid.ai, an AI-powered billing and contract-to-cash platform for growing companies.