New Legislation Expands Qualified Small Business Stock Exclusion

On July 4, 2025, President Donald Trump signed into law the bill known as the One Big Beautiful Bill Act (OBBBA). The provisions of the new law addressing qualified small business stock (QSBS) mirror those that were included in the Senate Finance Committee proposal that was released a few weeks earlier on June 16, 2025.

The new law will greatly expand the availability and benefits of the QSBS exclusion, as evidenced by the fact that the Joint Committee on Taxation scored the provision to cost the federal government $17,186,000,000. While there have been many previous proposals to limit the scope of section 1202, the section of the tax code addressing QSBS, the new law expands the QSBS exclusion in a way that is consistent with the current administration’s pro-growth policies.

Section 1202 provides a full or partial exclusion of capital gain realized on the sale of QSBS that is held for more than five years. There are various requirements in order for stock to constitute QSBS – there are some that apply to the company that issued the QSBS (company-specific requirements), and there are some that apply to the shareholder that is selling the QSBS (shareholder-specific requirements). If all the requirements are met, then a selling shareholder can exclude from gross income capital gain in an amount equal to the greater of (i) a cumulative per-issuer amount of $10 million or (ii) an annual exclusion of 10 times the basis in the stock sold (for an exclusion amount up to $500 million). There are also specific tax strategies, like stacking and packing, that enable shareholders to magnify their QSBS tax benefits.

The exact exclusion percentage depends on the date a selling shareholder acquired the stock from the issuing company, rather than the date on which the stock is sold. The percentage options are 50%, 75% and 100%, with the latter being applicable to QSBS acquired after September 27, 2010. No stock issued before August 11, 1993 can qualify as QSBS.

The OBBBA makes three important changes to the rules governing QSBS. The first change allows for a tiered gain exclusion instead of a five-year holding period “cliff.” The new regime allows for a 50% exclusion after three years, a 75% exclusion after four years and a 100% exclusion after five years. This expands the number of taxpayers that can benefit from a QSBS exclusion and does not require them to go through the hoops of a qualified rollover under section 1045 if they sell before the five-year holding period requirement is met. Importantly, the new rule applies only to stock issued on or after July 5, 2025. Thus, a company can issue new stock to its investors that meets this requirement, but stock issued before July 5, 2025, remains subject to the five-year holding period requirement. Companies can restructure their operations to qualify “old” stock, but there are anti-abuse rules that need to be navigated.

The second change increases the cumulative per-issuer gain limit from $10 million to $15 million, indexed for inflation beginning in 2027. Most taxpayers are limited by the $10 million limit (rather than the annual 10-times-basis rule) because most start-ups are funded with a nominal amount of cash. Recall that the annual 10-times-basis limit exceeds the cumulative $10 million limit only when a taxpayer’s initial basis exceeds $1 million. This typically arises after the incorporation of an ongoing business (i.e., a midstream incorporation) or the incorporation of a well-funded start-up, which is not that common. The new $15 million limit applies only to stock issued on or after July 5, 2025. Companies can consider restructuring to fall within this rule, as discussed above, but in most cases, they cannot just redeem “old” stock and issue new stock because there are redemption rules that would prevent the new stock from qualifying.

The $15 million limit is reduced by anyprevious QSBSgain exclusion, including with regard to stock acquired before July 5, 2025, so the total limit is $15 million (and not $25 million). Also, once a taxpayer exceeds the $15 million limit, as adjusted for inflation, then no further exclusion becomes available, just because the exclusion amount increases for inflation.

The OBBA also conforms the gain limitation for married taxpayers filing separately to accommodate the increase in the cumulative per-issuer gain limit from $10 million to $15 million, indexed for inflation. Before the OBBBA, married taxpayers filing separately were each entitled to a $5 million exclusion, or one-half of the $10 million limit. The OBBBA expands this to accommodate the $15 million exclusion amount (for stock issued on or after July 5, 2025), or $7.5 million to each spouse if they file separately, and less if they sell before five years.

Last, the OBBBA increases the limitation ceiling on a corporation’s “aggregate gross assets” from $50 million to $75 million, indexed to inflation beginning in 2027. This, too, represents an expansion of QSBS because QSBS generally includes stock issued to shareholders only up to the point where a corporation’s aggregate gross assets do not exceed $50 million. The OBBBA expands the timeframe for investors to make their investment and still qualify for QSBS treatment – research shows that many series B financings occur before businesses reach the $75 million mark.

The OBBBA introduces the most significant expansion of the QSBS exclusion in years. The QSBS exclusion was extremely taxpayer-friendly before the OBBBA, and it has now been expanded even further. The exclusion is available to many industries beyond technology and manufacturing, and taxpayers across the spectrum should consider QSBS planning sooner rather than later.