If you start or invest in a company organized as a C corporation, one section of the tax code can make the gain on a successful exit federally tax-free. Section 1202, the qualified small business stock (QSBS) exclusion, just got significantly more generous.
What changed
For stock issued after July 4, 2025, the One Big Beautiful Bill Act:
Shortened the holding period with a tiered exclusion:
Held 3 years: 50% of the gain excluded
Held 4 years: 75% excluded
Held 5 years or more: 100% excluded
Raised the per-company cap from $10 million to $15 million of excluded gain, indexed for inflation after 2026. The alternative cap, 10 times your basis in the stock, is unchanged, and you get whichever is larger.
Raised the size limit for issuing companies from $50 million to $75 million in gross assets at the time the stock is issued.
Stock issued on or before July 4, 2025 keeps the old rules: a five-year hold and a $10 million cap.
What qualifies
The company must be a domestic C corporation. LLCs and S corps don't qualify unless they convert, and only stock issued after conversion counts.
You must acquire the stock at original issuance, for money, property or services. Shares bought from another shareholder don't qualify.
The company must use at least 80% of its assets in an active qualified business. Many service businesses are excluded, including health, law, accounting, consulting, financial services, and most hospitality and farming.
Why it matters
On a $15 million gain, a full exclusion avoids the 20% long-term capital gains rate plus the 3.8% net investment income tax, roughly $3.57 million in federal tax. Even the new 3-year tier is worth up to about $1.19 million.
Things that trip people up
States may not follow. Some states, including California, don't recognize the federal exclusion.
Entity choice is early. Converting an LLC to a C corp years later only starts the clock then.
Redemptions can disqualify stock. Certain company buybacks around the time of issuance can taint QSBS status.
Documentation. Keep proof of the company's gross assets at issuance and its active-business status over time.
Who should talk to a tax advisor now
Founders deciding on entity type, anyone raising a new round, and investors in early-stage companies. The rules are generous, but the requirements are strict and the planning happens before the exit, not after.
Unboring is educational content, not tax or legal advice. QSBS has many technical requirements; work with a qualified advisor.
