Updated for July–August 2025 changes • Audience: Individual U.S. taxpayers, founders & early investors
Quick Take — What Changed Under the New Law
- Tiered exclusions tied to holding period: 50% after 3 years, 75% after 4 years, and 100% after 5+ years (for eligible post-effective-date QSBS).
- Higher gain cap per issuer: Up to the greater of $15,000,000 (per taxpayer, per issuer) or 10× basis, with future inflation indexing.
- Expanded eligibility size: The gross assets test rises from $50M to $75M at the time of issuance, with inflation adjustments going forward.
- Effective date & transition: Changes generally apply to QSBS acquired after July 4, 2025; earlier issuances keep prior-law rules (e.g., 100% exclusion only after 5 years, $10M cap).
Become Our Featured Tax Expert.
This premium ad space is reserved for one tax professional. Put your firm in the spotlight and reach qualified USA leads directly.
To claim this exclusive spot, contact us at [email protected].
1) QSBS basics (what didn’t change)
Qualified Small Business Stock (QSBS) under IRC §1202 continues to offer individuals a powerful federal capital-gain exclusion on the sale of qualifying shares if key criteria are met. Core concepts remain:
- Original issuance: You must acquire the stock at original issue (for money, property, or services) directly from a domestic C-corp.
- Active business requirement: At least 80% of assets must be used in an active qualified trade or business during substantially all of your holding period. Certain sectors (e.g., health, law, financial services) are excluded.
- Five-year horizon remains important: 100% exclusion still requires a 5-year hold, but see the new partial exclusions below.
- Per-taxpayer & per-issuer limits: The exclusion is calculated separately for each issuer and each taxpayer; planning may allow families/trusts to optimize who claims the benefit.
2) What’s new: caps, assets & holding periods
| Area | Prior Law | New Law (post-7/4/2025 QSBS) | Notes |
|---|---|---|---|
| Holding period tiers | 100% exclusion only at 5+ years | 50% at 3 yrs • 75% at 4 yrs • 100% at 5+ yrs | Applies to eligible new QSBS; earlier stock keeps old rule. |
| Per-issuer gain cap | Greater of $10M or 10× basis | Greater of $15M (per taxpayer/issuer) or 10× basis; indexed for inflation going forward | Indexing does not retro-adjust prior years’ realized gains. |
| Gross assets test | ≤ $50M immediately before/after issuance | ≤ $75M at issuance; indexed after 2026 | Measured at the corporate level; includes cash post-raise. |
3) New 3/4/5-year holding period rules
For QSBS acquired after July 4, 2025, you can now monetize gains sooner—through acquisitions, secondary sales, or partial exits—while still capturing partial exclusions at 3 or 4 years. A full 100% exclusion still requires 5+ years. The partial tiers do not apply to pre-effective-date QSBS.
3 Years
Exclude 50% of eligible gain (subject to cap).
4 Years
Exclude 75% of eligible gain (subject to cap).
5+ Years
Exclude 100% of eligible gain (subject to cap).
Tip: If an exit is likely before five years, model the trade-off between timing and the exclusion tier to optimize after-tax proceeds.
4) Higher exclusion caps & the 10× basis alternative
The per-issuer cap for post-7/4/2025 QSBS increases to the greater of $15,000,000 or 10× your aggregate adjusted basis. The 10× basis path can create a much larger exclusion where founders or early investors have substantial cost basis (e.g., sizeable cash investments or property contributed at formation).
- Per-taxpayer rule: The cap applies per taxpayer per issuer, which is why families sometimes consider “QSBS stacking” across spouses and non-grantor trusts (ensure substance and state law compliance).
- Indexing: The $15M cap will be indexed for inflation (no retroactive uplift for gains realized in prior years).
- Interaction with partial tiers: The cap applies regardless of whether your exclusion is 50%, 75% or 100%—it limits the amount of gain eligible for exclusion.
5) Gross assets test now $75M (with future indexing)
To qualify as a qualified small business at issuance, the corporation’s gross assets (generally tax basis, including cash raised) must not exceed $75,000,000 immediately before and after the issuance for post-effective-date QSBS. Inflation adjustments begin after 2026, expanding eligibility as the economy scales.
Founder note: Plan your fundraise tranches to stay within the threshold at issuance if QSBS treatment is a priority. Cash on the balance sheet counts toward the limit.
6) Eligibility checklist (high-level)
For taxpayers
- Non-corporate taxpayer (individual, certain trusts/estates).
- Acquired at original issue (not from another shareholder).
- Meet applicable holding period (3/4/5 years for post-7/4/2025 shares).
- Mind wash-sale-like pitfalls: certain redemptions near issuance can taint QSBS.
For the company
- Domestic C corporation at issuance and sale.
- Gross assets ≤ $75M at issuance (post-effective-date QSBS).
- 80%+ active business test satisfied for substantially all of holding period.
- Not an excluded trade (e.g., health, law, finance, hospitality, farming, etc.).
7) Effective dates, transition & planning timeline
Applies to
- QSBS acquired after July 4, 2025 (new tiers, $15M cap, $75M assets test).
- Pre-7/5/2025 QSBS keeps prior rules (e.g., 100% only at 5 years; $10M cap).
Action items (founders/investors)
- Document original issue and gross assets around funding rounds.
- Track holding periods by lot; model exits at 3, 4, and 5 years.
- Coordinate trusts/spousal gifting carefully if considering “stacking.”
- Review SAFEs/notes and equity conversion timing with counsel (open issues are being clarified in guidance).
Become Our Featured Tax Expert.
This premium ad space is reserved for one tax professional. Put your firm in the spotlight and reach qualified USA leads directly.
To claim this exclusive spot, contact us at [email protected].
8) Worked examples
| Scenario | Key facts | Exclusion result |
|---|---|---|
| Founder sells after 3 years | Basis $200k; Gain $8M; Post-7/4/2025 QSBS; Per-issuer cap $15M or 10× basis | 50% exclusion: $4M excluded (cap not binding). Remaining $4M taxed as capital gain. |
| Investor sells after 4 years | Basis $2M; Gain $20M; 10× basis = $20M; Cap = greater of $15M or 10× | 75% exclusion applies to eligible gain up to $20M (the 10× cap). Up to $15M excluded (75% × $20M = $15M), $5M taxable. |
| Five-year exit hits the flat cap | Basis $100k; Gain $30M; 10× basis = $1M; Flat cap = $15M | Eligible gain limited to $15M (flat cap). At 100% exclusion (5+ years), $15M excluded; $15M taxable. |
9) Planning strategies for U.S. individuals
Founders & employees
- Confirm stock qualifies as original issue; maintain robust cap table and subscription docs.
- Coordinate option exercises, early exercise, and 83(b) timing to start the QSBS clock.
- Model potential secondary sales at 3 or 4 years if liquidity is essential.
Angel/VC investors
- Structure investments as stock (not SAFEs/notes) when feasible to ensure original-issue QSBS at conversion (watch evolving guidance).
- Track per-issuer caps and consider trust-based planning with counsel for legitimate per-taxpayer optimization.
- Use §1045 rollovers to preserve QSBS gain on reinvestment into new QSBS (subject to 60-day window and technical rules).
Company readiness
- Audit gross assets around financing rounds to stay under the $75M threshold at issuance.
- Monitor redemptions near issuance—disqualifying buybacks can taint QSBS.
- Keep the 80% active business test top of mind as cash balances grow post-raise.
Tax modeling
- Run multi-year scenarios for exits at 3/4/5 years vs. later mega-rounds.
- Coordinate with state taxes—some states don’t conform to §1202.
- Document basis carefully to support the 10× test and future audits.
Become Our Featured Tax Expert.
This premium ad space is reserved for one tax professional. Put your firm in the spotlight and reach qualified USA leads directly.
To claim this exclusive spot, contact us at [email protected].
10) FAQs
Does the 3/4/5-year schedule apply to my existing QSBS?
No. The partial tiers generally apply to new QSBS acquired after July 4, 2025. Earlier issuances remain under prior law (100% exclusion only after 5 years).
Is the $15M cap per issuer or across all my holdings?
Per issuer, per taxpayer. You still compare the flat cap to the 10× basis alternative and use the greater amount as your maximum eligible gain.
What about SAFEs and convertible notes?
Original-issue stock is the key. Conversions can qualify, but details matter; expect further IRS guidance on instruments like SAFEs.
Do all states recognize §1202?
No. Some states do not conform (or conform differently). Model state taxes alongside federal before closing any sale.
This guide summarizes recent federal changes to §1202 as publicly described through August 16, 2025. The material is general information, not tax or legal advice. Facts and state conformity vary—consult your advisor before taking action.
