The recent One Big Beautiful Bill Act signed into law on July 4, 2025 (the “Act”) expands the favorable tax treatment for QSBS acquired after July 4, 2025, under Internal Revenue Code Section 1202.
Specifically, the Act amends the holding period for QSBS acquired after July 4, 2025, so that it is no longer an “all or nothing” 5-year holding period. Previously to obtain the capital gain exclusion under Section 1202 a shareholder must have held QSBS for at least 5 years. Under the amendments, the holding period for QSBS is shifted to a tiered holding period structure along with increases to the eligible gain limit and amount of gross assets of a “qualified small business” as follows:
- The taxpayer receives a 50% exclusion for QSBS held for 3 years;
- The taxpayer receives a 75% exclusion for QSBS held for 4 years; and
- The taxpayer receives a 100% exclusion for QSBS held for 5 years or more.
This allows taxpayers to at least get partial benefit of Section 1202 even though they have not held their QSBS for the entire 5 years. QSBS obtained on or before July 4, 2025, must still satisfy the prior five-year rule to receive an exclusion.
The Act also increased the gain exclusion upon the sale of QSBS to the greater of (a) $15 million per shareholder in the aggregate (adjusted for inflation beginning in 2027) or (b) 10 times the shareholder’s aggregate adjusted basis in the QSBS issued and sold by the taxpayer during the year.
In addition, the ACT also increased the amount of gross assets that a domestic C corporation can have in order for stock issued after July 4, 2025 to qualify as QSBS from $75 million or less (as adjusted for inflation starting in 2027) (which is an increase from $50 million or less for QSBS issued on or prior to July 4, 2025).
As always, we recommend that you discuss any sale or other disposition of stock with your professional tax advisor prior to making any decisions.
Please reach out to me at bds@sfcounsel.com for further information or assistance.
– Written By Brandon D. Smith