Tax

QSBS Just Got Bigger: What the One Big Beautiful Bill Act Changed About Section 1202

The One Big Beautiful Bill Act reshaped QSBS: a bigger $15M exclusion, a $75M size ceiling, and a new 3-year tiered holding period. What founders should know.

By 409.AI Team - 2026-07-08

For years, Qualified Small Business Stock has been one of the most valuable tax breaks a founder or early employee could stumble into, and one of the most under-planned. You hold the right kind of stock in the right kind of company for five years, and up to $10 million of your gain comes out federally tax-free. Plenty of people who qualified never realized it until a tax advisor caught it at exit.

The One Big Beautiful Bill Act (OBBBA), signed into law on July 4, 2025, rewrote the math. The exclusion is larger, the holding period is shorter, and more companies now fit under the size ceiling. If you're a founder issuing equity, an angel writing early checks, or a finance lead cleaning up a cap table, the changes are worth understanding before your next round of stock grants goes out.

Here's what actually changed, what stayed the same, and where the new rules create planning opportunities that didn't exist a year ago.

A quick refresher on Section 1202

Section 1202 of the Internal Revenue Code lets certain shareholders exclude gain from selling Qualified Small Business Stock (QSBS). The stock has to clear several tests, and they're strict. Miss one and the whole exclusion can evaporate.

The core requirements haven't gone anywhere:

The issuer must be a domestic C corporation, both when the stock is issued and during substantially all of the time you hold it. LLCs and S corps don't produce QSBS, which is one reason the C-corp-versus-LLC decision matters so much at formation.

You must acquire the stock at original issuance, directly from the company, in exchange for money, property, or services. Buying shares from another shareholder on the secondary market doesn't count.

At least 80% of the company's assets have to be used in an active qualified trade or business for substantially all of your holding period. Certain fields are excluded, including health, law, accounting, consulting, financial services, and any business where the principal asset is the reputation or skill of its employees.

And the company has to pass an aggregate gross assets test at and immediately after the stock is issued. This is one of the numbers OBBBA moved.

If you've never had a formal read on what your shares are actually worth, it's worth understanding [what your stock options are really worth](https://409.ai/articles/understanding-409a-valuation-for-employees) before you start modeling a QSBS exit.

What OBBBA changed

Three big levers moved. All of them apply to QSBS acquired after July 4, 2025. Stock you acquired on or before that date keeps playing by the old rules, which matters more than it sounds and I'll come back to it.

1. The five-year cliff became a tiered ramp

Under the old rules, it was all or nothing at five years. Hold for 100% exclusion, or sell early and get zero.

OBBBA replaced that cliff with a phased schedule for stock acquired after July 4, 2025:

• Hold at least **three years**: exclude **50%** of eligible gain.
• Hold at least **four years**: exclude **75%**.
• Hold at least **five years**: exclude **100%**, same as before.

This is a real shift for founders who exit through an early acquisition. A three-year hold used to mean the full gain was taxable as a capital gain. Now half of it can come off the top, up to the cap.

One caution worth flagging: the portion of gain that isn't excluded under the 50% and 75% tiers is generally taxed at a maximum 28% rate rather than the standard long-term capital gains rate, and it can be exposed to the 3.8% net investment income tax. The AMT interaction on the partial tiers is a live question, so if you're selling before year five, have your advisor run the actual numbers rather than assuming a flat capital-gains figure.

2. The per-issuer cap climbed from $10M to $15M

The lifetime exclusion cap, applied per company per taxpayer, used to be the greater of $10 million or 10 times your adjusted basis in the stock. OBBBA raised the flat figure to $15 million for post-July-4-2025 stock, and it starts adjusting for inflation in 2027.

The 10-times-basis alternative survived, which is the part that quietly does the heavy lifting for investors who put real money in. If you invested $2 million and later sell for a $30 million gain, your cap is the greater of $15 million or 10 times $2 million, so $20 million. You'd exclude $20 million and pay tax on the remaining $10 million. For founders with near-zero basis, the $15 million flat cap is the number that matters, and it's now 50% higher than it was.

3. The size ceiling rose from $50M to $75M

To issue QSBS, a company's aggregate gross assets can't exceed a set threshold at the time of issuance. OBBBA lifted that ceiling from $50 million to $75 million, also indexed for inflation starting in 2027.

This one widens the door. Companies that had already grown past $50 million in gross assets, later-stage startups raising sizable rounds, were locked out of issuing new QSBS. A meaningful band of growth-stage companies can now keep granting qualifying stock where they previously couldn't. If you're issuing new equity around a priced round, the interaction between your raise and this threshold is worth checking, and it connects to how [venture funding affects your valuation work](https://409.ai/articles/409a-valuation-for-venture-capital-funding).

A worked example

Say you're a founder. You're issued common stock at incorporation in September 2025 with essentially no basis. The company qualifies as a small business under the new $75 million ceiling. Five years later it's acquired, and your share of the gain is $20 million.

Because you held for five years, 100% of the gain is eligible for exclusion, but only up to your cap. Your cap is the greater of $15 million or 10 times your basis. With near-zero basis, that's $15 million. So $15 million is excluded from federal tax, and the remaining $5 million is taxable.

Now change one fact. The acquisition happens at the three-year mark instead. You're in the 50% tier, so $10 million of the $20 million gain is potentially excludable, still subject to the $15 million cap. The other $10 million is taxable, generally at that 28% maximum rate. Same company, same shares, very different outcome depending on timing. That's the trade-off the new ramp creates.

What did not change, and the trap in the effective date

The eligibility tests are the same. C corp, original issuance, active business, the excluded industries, the redemption rules that can taint your stock if the company buys back shares within a two-year window around your issuance. OBBBA made QSBS bigger; it didn't make it easier to qualify.

The sharpest thing to understand is the effective date. The expanded rules apply only to stock acquired after July 4, 2025. Shares issued on or before that date stay under the old regime: the flat $10 million cap, the $50 million asset ceiling, and the hard five-year cliff with no partial exclusion.

So a cap table can now hold two classes of QSBS with different rules baked into the same certificates. Founder shares from 2023 follow the old law. A new grant to a 2026 hire follows the new law. Getting this wrong at exit is an expensive mistake, and it's exactly the kind of thing that gets missed when nobody's tracking issuance dates against the statute.

Why this connects to your 409A valuation

QSBS and 409A valuations live in different parts of the tax code, but they touch the same document: your cap table, and the value behind it.

Every time you issue stock or grant options, you're relying on a defensible fair market value. That's what a [409A valuation](https://409.ai/articles/what-is-a-409a-valuation-a-comprehensive-guide) establishes for option strike prices, and it's a different exercise from the fair market value concepts that show up elsewhere in tax and financial reporting. If you're fuzzy on why those two numbers aren't the same thing, [409A versus fair market value](https://409.ai/articles/409a-valuation-vs-fair-market-value) is worth a read.

The practical link is documentation. Claiming QSBS at exit means proving the company met the gross assets test when your stock was issued, that it was a C corp, that the business was active. Those facts are far easier to establish when your valuation and equity records were clean from the start. Founders who treat [the 409A process](https://409.ai/articles/inside-the-409a-valuation-process) as a checkbox tend to be the same ones scrambling for records years later when a $15 million exclusion is on the line.

If you're early and setting up equity for the first time, the [startup guide to 409A valuations](https://409.ai/articles/409a-valuation-for-startups-what-you-must-know) covers the foundation that a QSBS strategy eventually sits on top of.

What to do now

If you issue equity, three moves are worth making. Confirm your entity is actually a C corporation, because QSBS dies at the LLC or S-corp door. Track the issuance date of every grant against July 4, 2025, so you know which rule set each block of stock lives under. And if you're near the $75 million gross-assets ceiling, coordinate the timing of new grants with your fundraising, because once you cross it, the QSBS window on new issuances closes.

None of this is a substitute for advice on your specific facts. QSBS is unusually unforgiving, the stacking and gifting strategies that multiply the cap have real complexity, and the AMT and state-conformity questions vary. Work the numbers with a qualified tax advisor before you rely on them.

What's clear is the direction. Congress made QSBS more generous and more accessible than it's been in over a decade. For founders building in a C corp, a shorter holding period, a larger exclusion, and a higher size ceiling turn a footnote into a genuine reason to plan. The companies that capture it will be the ones that got their cap table and their valuations right early, not the ones that went looking for the paperwork the week before a sale.

If a QSBS attestation is on your radar, 409.ai's [QSBS eligibility attestation](https://409.ai/products/qsbs) documents whether your stock meets the Section 1202 tests, expert-reviewed and built to hold up under IRS scrutiny.