QSBS Just Got a Major Upgrade: What Founders, Investors, and Startups Need To Know After the One Big Beautiful Bill Act

Section 1202 of the Internal Revenue Code—governing Qualified Small Business Stock (QSBS)—has long served as a powerful tool for tax-advantaged exits by startup founders, early-stage employees, and investors. But until now, its utility was constrained by a rigid five-year holding period, a relatively low-gain exclusion cap, and eligibility limits that disqualified many growth-stage companies.

That changed on July 4, 2025, when President Trump signed the One Big Beautiful Bill Act ("OBBBA") into law. This landmark tax legislation makes sweeping changes to Section 1202, expanding access to the capital gains exclusion and offering more flexibility for planning liquidity events. These changes will have significant implications for founders, startups and venture-backed companies, investors, and estate planners in connection with QSBS issued after July 4, 2025.

The changes to Section 1202 under the OBBBA only apply to QSBS issued after the July 4, 2025, date of enactment of the OBBBA. QSBS issued on or before July 4, 2025, continue to be subject to the preexisting rules of Section 1202. The scope of the potential exclusions from gross income on the disposition of otherwise qualifying QSBS, as well as the key updates to the QSBS rules under the OBBBA and how they may affect planning strategies going forward, are outlined below.

Key Changes to Section 1202 Under the OBBBA

Tiered Gain Exclusion Based on Holding Period

Prior Law: 100% exclusion of gain on QSBS held for more than five years (for stock acquired after Sept. 27, 2010). No exclusion for stock held less than five years.

• 3-year holding period: 50% gain exclusion
• 4-year holding period: 75% gain exclusion
• 5 years or more: 100% gain exclusion (unchanged)

This new structure allows for partial exclusions and earlier exits while still rewarding long-term investment. Note, however, that any gain not excluded in connection with sales of QSBS with a 3-year or 4-year holding period is taxed at a 28% capital gains tax rate rather than the normal 20% capital gain rate.

Increased Gain Exclusion Cap

Prior Cap: The greater of $10 million per taxpayer per issuer or 10× the taxpayer's basis in the stock.

New Law: The $10 million cap is now increased to $15 million, with annual indexing for inflation. The 10× basis alternative continues to apply.

This change expands the federal tax benefits available to founders, early-stage employees and investors who experience high-multiple exits.

Expanded Company Eligibility: Higher Asset Threshold

Prior Limit: QSBS benefits applied only to C corporations with $50 million or less in gross assets at the time of stock issuance.

New Law: Raises the gross asset limitation to $75 million, with inflation adjustments.

This change brings a broader universe of late-stage and growth-stage startups within the scope of QSBS—especially those receiving larger rounds of venture capital or engaging in acquisitions.

State Nonconformity and the Importance of State Income Tax Planning

While the federal tax landscape for QSBS has improved significantly, not all states conform to Section 1202. As a result, even fully excluded federal gain may still be taxable at the state level. As of July 2025, the following states do not conform to the federal QSBS exclusion, meaning gain is fully taxable under state income tax law: Alabama, California, Mississippi, New Jersey,[1] and Pennsylvania; and the following are partially conforming: Hawaii and Massachusetts. States such as New York conform only partially, while others may delay implementing the OBBBA's updates. For taxpayers in these jurisdictions—or those who move there prior to a liquidity event—state income tax can significantly reduce the benefit of the QSBS exclusion.

Strategic Response: Use of Non-Grantor Trusts in Tax-Friendly Jurisdictions

One planning strategy gaining traction is the use of non-grantor irrevocable trusts located in no-income-tax jurisdictions. Properly formed and administered, these trusts can own QSBS and potentially avoid both federal and state capital gains tax, assuming all Section 1202 requirements are met.

States to consider for trust situs may include Alaska, Delaware, Nevada, South Dakota, and Wyoming.

While powerful, these strategies require thoughtful coordination between legal, tax, and fiduciary advisors to mitigate audit risk and state-level challenge.

Planning Implications and Strategic Takeaways

With the OBBBA now law, the Section 1202 landscape has shifted substantially. Planning considerations now include:

• Shorter-term exit flexibility with partial exclusions at 3 and 4 years;
• Higher exclusion caps allowing more gain to be sheltered from federal income tax;
• Expanded eligibility for more companies issuing QSBS, including companies that have previously exceeded the $50 million aggregate gross asset limitation under prior law;
• Critical state-level planning through situs trusts and early-stage gifting; and
• Potential for exclusion "stacking" using non-grantor trusts across multiple family members.

Founders, investors, and early-stage employees should reevaluate estate plans and exit timing strategies in light of the new rules, taking into consideration their existing holdings that will remain subject to the preexisting QSBS rules.

The One Big Beautiful Bill Act has delivered the most significant upgrade to QSBS in more than a decade. With increased flexibility, broader company eligibility, and higher gain caps, the new law creates major opportunities for startup companies in the process of raising equity and for startup stakeholders to reduce—or even eliminate—capital gains tax on successful exits. However, maximizing these benefits still requires careful planning, particularly in light of state nonconformity and potential aggregation rules for trusts. If you are an early-stage company or are considering how to structure ownership of fast-growing equity, now may be an excellent time to review your approach.