By: Mashal Amber Ali and José Padilla
When the One Big Beautiful Bill Act (“OBBBA”) was signed into law on July 4, 2025, it significantly expanded Section 1202 of the Internal Revenue Code to enhance the Qualified Small Business Stock (“QSBS”) tax incentive. This article summarizes quickly the most relevant changes for venture capital investors and founders.
QSBS provides tax incentives for shareholders, such as, founders, early employees, and investors to exclude up to 100% of capital gains from federal taxes when selling shares in eligible startups. You can read our article here summarizing QSBS and why founders and investors should care about QSBS. In short, QSBS allows for a tax-free sale of stock (up to a certain amount) if the investor and the startup’s corporation meet all of its criteria.
The OBBBA made three key changes to QSBS that have made it even more favorable for shareholders of eligible startups. These changes summarized below create greater tax benefits and materially increase the value to investors and emerging company founders in considering QSBS qualification early on in the process of forming and operating a corporation.
Tiered Holding Period for Exclusions
Prior to July 4, 2025, shareholders were required to hold QSBS eligible stock for a period of 5 years. However, the OBBBA has changed this requirement to establish a tiered exclusions for QSBS acquired after July 4, 2025.
- For QSBS held for at least three years (but less than four years): 50% exclusion
- For QSBS held for at least four years (but less than five years): 75% exclusion
- For QSBS held for at least five years: 100% exclusion
This tiered approach offers founders and investors more flexibility regarding when to sell their shares to receive partial tax benefits on their investments. It also offers investors the opportunity to plan exits based on market conditions without being locked into the full 5-year waiting period.
Increased Gain Exclusion Cap
The gain exclusion cap is the amount of capital gain upon the sale of a QSBS qualified stock that an investor can exclude from capital gains tax. For stock issued prior to July 4, 2025, the amount of gain a shareholder can exclude is capped at the greater of $10 million or 10 times the stock’s basis in the year it is sold. For QSBS acquired on or after July 4, 2025, the gain exclusion cap is now increased to $15 million per issuer, and beginning in 2027 this cap will continue to be adjusted for inflation. A QSBS eligible shareholder may also, instead, receive the tax benefit of 10x the aggregate adjusted basis of the QSBS if it is greater than the cap of $15 million. This allows for more tax benefits for investors and founders alike for capital gains.
Expanded the Gross Asset Threshold
The OBBBA also increased the size of the business eligible to issue QSBS from $50 million to $75 million effective for stock acquired on or after July 4, 2025. This allows for more companies to be eligible for these tax benefits if they meet other QSBS qualifications as well.
Overall, founders and investors alike gain significant tax benefits from the changes to QSBS under the OBBBA for stock acquired on or after July 4, 2025.
This article lays out brief summary of the changes to Qualified Small Business Stock tax benefit under OBBBA, but please note that this article (1) is not provided in the course of and does not create or constitute an attorney-client relationship, (2) is not intended as a solicitation, (3) is not intended to convey or constitute legal advice, or (4) is not a substitute for obtaining legal advice from qualified professionals.