If you hold stock in an eligible startup or small business, Section 1202 of the tax code can let you exclude a substantial amount of the gain when you eventually sell — and the One Big Beautiful Bill Act (OBBBA) made this break significantly more valuable for stock issued after July 4, 2025.
What Changed Under OBBBA
For Qualified Small Business Stock (QSBS) issued after July 4, 2025, the gain exclusion cap rose from $10 million to $15 million, and the company-level aggregate gross asset threshold to qualify as a small business rose from $50 million to $75 million. Stock acquired on or before that date is still governed by the old $10 million cap and $50 million asset threshold — the new, more generous rules aren’t retroactive.
The New Tiered Holding Period
Previously, QSBS required a full 5-year holding period to get any exclusion at all. OBBBA introduced a tiered schedule for stock issued after July 4, 2025: a 50% exclusion at 3 years held, 75% at 4 years, and the full 100% exclusion at 5 years. This means founders and early employees can now access a partial tax benefit years earlier than before, instead of an all-or-nothing 5-year cliff.
The Catch on Partial Exclusions
The portion of gain that isn’t excluded under the 3- or 4-year tiers is taxed at a flat 28% rate on the unexcluded amount, rather than the standard 15% or 20% long-term capital gains rates that would otherwise apply. Whether selling early at a partial exclusion beats waiting for the full 5-year, 100%-exclusion, standard-rate outcome depends heavily on your specific numbers — this is a calculation worth running with a CPA rather than assuming earlier is always better.
Core Eligibility Still Applies
The underlying eligibility rules haven’t loosened: the stock must be issued directly by a domestic C corporation (not acquired secondhand on an exchange), the company must meet the active-business requirement (certain fields like finance, farming, hospitality, and personal services are excluded), and you generally need to have acquired the stock at original issuance, not through a later purchase from another shareholder.
Why This Matters for Entity Choice
QSBS only applies to C corporation stock — S corporations, partnerships, and LLCs taxed as pass-throughs don’t qualify, regardless of how small or early-stage the business is. If you’re a founder deciding on an entity structure with a future exit in mind, this exclusion is one of the strongest arguments for a C corp despite its double-taxation drawback on ordinary profits along the way, an important trade-off compared to how we cover other entity decisions like Solo 401(k) vs. SEP-IRA for the self-employed.
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