Short answer: for Qualified Small Business Stock (QSBS) acquired after July 4, 2025, founders and investors can exclude 50% of the gain after three years, 75% after four years and 100% after five years, up to a per-company cap that rose to $15 million (or ten times basis, if greater). Companies can also qualify with up to $75 million in gross assets, up from $50 million. Stock acquired earlier stays under the old rules.
What is QSBS?
Section 1202 of the tax code lets shareholders of qualifying C corporations exclude some or all of the gain when they sell stock they received at original issuance, if the company and the stock meet a series of requirements. For founders and early investors, it can be one of the most valuable tax benefits available at exit.
What changed in 2025
| Before July 5, 2025 | After July 4, 2025 | |
|---|---|---|
| Holding period | 100% exclusion after 5 years; nothing before | 50% at 3 years, 75% at 4 years, 100% at 5 years |
| Per-company cap | $10 million or 10x basis | $15 million (indexed for inflation from 2026) or 10x basis |
| Gross asset limit | $50 million | $75 million (indexed for inflation from 2026) |
Any gain that is not excluded is taxed at a maximum 28% rate under Section 1202.
Why it matters for exit planning
- Earlier exits can now carry a partial benefit, which may change how founders weigh an offer in years three or four.
- The higher asset limit means more growing companies can issue qualifying stock.
- Records matter: you will need to show the company qualified when the stock was issued and throughout the holding period.
What finance teams should do now
- Confirm the company's entity type and whether it meets the QSBS requirements.
- Track gross assets at each stock issuance.
- Keep a clean cap table with issuance dates and basis for every holder.
- Discuss with tax advisors before any restructuring, redemption or transaction.
Frequently asked questions
Does QSBS apply to LLCs or S corporations?
Generally no. QSBS applies to stock in C corporations. Conversions are possible but need careful planning with advisors.
Do the new rules apply to stock I already own?
Stock acquired on or before July 4, 2025 generally stays under the prior rules.
Are all industries eligible?
No. Certain service businesses and other industries are excluded. Confirm eligibility with your tax advisor.
This article is general information, not tax or legal advice. Tax rules change and depend on your facts; review your situation with your CPA or tax advisor before acting.
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