A pivotal update for startup equity
Founders and early-stage investors have long loved Section 1202’s Qualified Small Business Stock (QSBS) exemption, which can shelter up to 100 percent of gains from federal tax after a five-year holding period. But until now, the statute hadn’t kept pace with rising valuations and longer fundraising cycles.
That changed on July 4, 2025, when President Trump signed the One Big Beautiful Bill Act (OBBBA). Buried in the fireworks was a three-part makeover of QSBS that applies to shares issued on or after July 4, 2025.
A quick refresher on the old rules
Under the pre-OBBBA regime you had to clear four hurdles:
- Original issuance – you acquired the shares directly from the C-corp (no secondary purchases).
- $50 million asset ceiling – the company’s gross assets stayed under that mark before and immediately after the issuance.
- Active business test – at least 80 percent of assets were used in an operating business during most of your holding period.
- Five-year clock – you held the stock for more than five years.
Meet those tests and you could exclude the greater of $10 million in gains or 10 × your basis when you eventually sold.
What the OBBBA changes
The new law keeps the core framework but tweaks three key levers:
1. A sliding-scale exclusion
| Holding period | Exclusion | Effective federal rate* |
|---|---|---|
| ≥ 3 years and < 4 years | 50 % | ≈ 15.9 % |
| ≥ 4 years and < 5 years | 75 % | ≈ 7.95 % |
| ≥ 5 years | 100 % | 0 % |
*Assumes current 23.8 % combined capital gains and net investment income tax; QSBS gain remains excluded from the alternative minimum tax.
2. Bigger per-issuer cap
The lifetime limit per corporation jumps to $15 million, with inflation adjustments beginning in 2027. The alternative 10 × basis test is unchanged.
3. Higher asset threshold
A corporation can now raise capital until its gross assets hit $75 million (up from $50 million), also indexed for inflation after 2027. Bonus depreciation and the renewed "full expensing" rules may help some startups stay under the line longer.
Timing and transition wrinkles
The law is simple: only stock issued (or deemed issued) on or after July 4, 2025 gets the new deal. But three nuances matter:
- No clock-reset tricks. If you exchange pre-July 4, 2025 QSBS for new shares (for example in a tax-free reorg or under §1045 rollover), your original holding period carries over. You can’t restart the calendar to access the three-year tier.
- Old cap still applies to old stock. Gains on shares you already own remain subject to the $10 million per-issuer limit, even if you sell after the effective date.
- Double-stacking possible. A company that maxed out the old $50 million asset ceiling can issue an additional $25 million of fresh QSBS after July 4, creating two pools of shares with different limits.
Meticulous cap table and basis tracking will be critical for both founders and finance teams.
Strategic takeaways for founders and investors
- Liquidity flexibility. The three-year and four-year tiers give you earlier off-ramps without nuking all of the tax benefit.
- Extended issuance runway. Higher asset limits let growth-stage companies issue QSBS deeper into Series B/C territories.
- Trust planning is still powerful. Techniques like a Nevada Incomplete-Gift Non-Grantor (NING) Trust can now pair with a larger federal exclusion.
- Recordkeeping matters more than ever. Expect the IRS to scrutinize mixed-vintage share sales; solid documentation will save headaches.
The bottom line
The OBBBA refreshes QSBS for a bigger, longer fundraising world—without gutting its most beloved feature: a potential zero percent tax rate after five years. Founders, angels, and VCs should revisit their exit models and estate plans to squeeze the most juice out of these new rules.
Have questions about how to navigate the changes? The Dynasty team can help you structure trusts, transfers, and recordkeeping so you don’t leave money on the table.