Changes to QSBS under the OBBBA

Congress just passed, and President Trump signed, the One Big Beautiful Bill Act (OBBBA)—a sweeping package aimed at boosting American innovation and capital formation. Buried in the bill is Section 70431, which dramatically expands the Qualified Small Business Stock (QSBS) exclusion under IRC §1202. If you’re a founder, early-stage investor, or tax advisor, this is big news.

Let’s break it down.

1. Phased QSBS Gain Exclusion Starting at 3 Years

Under prior law, only QSBS held more than 5 years qualified for exclusion—either 50%, 75%, or 100% depending on acquisition date.

Under the new law:

🔹 This only applies to stock acquired after July 4, 2025.

🔹 For stock issued on or before July 4, 2025, the old rule (5 years = 100% if post-2010) still applies.

2. QSBS Gain Cap Raised from $10M to $15M

The per-issuer gain exclusion cap is increased:

• $10 million cap for stock issued on or before July 4, 2025.
• $15 million cap for stock issued after July 4, 2025, with an inflation adjustment starting in 2027
• Coordinating rules prevent double-dipping across old and new caps

Also worth noting: If you hit the $15M cap, future increases won’t raise your limit for that issuer.

3. Company Asset Threshold Increased to $75M

Previously, to be able to issue QSBS, the company had to have < $50 million in gross assets at and before the issuance. Now, that threshold increases to $75 million, with inflation adjustments starting in 2027. This expands eligibility to more mature startups and growth companies—especially relevant in tech and life sciences where early funding rounds are often large. 

Planning Implications

• Shorter hold, earlier tax break – Investors can exit after 3 years and still benefit.
• More issuers qualify – Higher asset threshold opens the door to later-stage startups.
• New cap, new strategy – The $15M exclusion makes QSBS more compelling for venture-scale investments. 

Final Thoughts

The OBBBA’s overhaul of Section 1202 is founder- and investor-friendly. It rewards long-term growth capital while giving more flexibility for earlier exits.

If you’re involved in entity structuring, stock grants, or liquidity planning, now is the time to reevaluate your QSBS strategies. Whether it’s capturing the new 3-year benefit, navigating gain caps, or timing grants post-enactment—we’re here to help.

Reach out to mike@mbakertaxlaw.com if you’d like to model your benefits, get a QSBS attestation letter, or prep for an exit.

Update, July 9

In the last several days I have had a half dozen inquiries, like: “Hi, I’m wondering if our very-newly formed clients should consider dissolving and reincorporating to take advantage of the new rules.”

What works:

1. New Issuances Post-7/4/25:
• Founders can receive new stock (e.g., via bonus issuance, restricted stock, or RSAs) after July 4 to benefit from the $15M cap under the new rules.
2. Note Conversions After 7/4/25:
• If a convertible note was signed before July 4 but converts after, it should still qualify under post-7/4/25 rules.
3. Equity Comp Refresh:
• Employees or early contributors could be issued additional post-7/4/25 stock (via refresh grants or new equity pools).
4. Spinoffs or Carve-Out Subs:
• A startup might move a business line into a new C-corp and raise from new investors with clean post-7/4/25 QSBS.
• Works best for companies with multiple product lines or IPs.

Less Likely to Be Helpful

• “Re-issuing” existing stock or trying to “refresh” old QSBS into new simply won’t reset the date — the IRS will view it as a continuation.
• Stock dividends or splits also won’t change QSBS eligibility date or amount.
• Buying secondary shares from old holders: secondary buyers don’t get QSBS.
• Tax-free reorgs (e.g., F-reorgs or A/B mergers). QSBS holding period tacks in many reorgs, meaning you don’t get post-7/4/25 treatment.

Mike Baker frequently advises with respect to qualified small business stock. He possesses a breadth and depth of experience in tax and employee benefits & compensation law that spans multiple decades. For additional information, please contact mike@mbakertaxlaw.com.