Expansion of Qualified Small Business Stock Benefits Under OBBBA

Recent changes enacted under the One Big Beautiful Bill Act ("OBBBA") signed by President Trump on July 4, 2025 include multiple amendments to the Qualified Small Business Stock exclusion rules which have made investments in early-stage C Corporations significantly more attractive. Under previous rules, taxpayers were eligible to exclude up to 100% of their capital gain from the sale of Qualified Small Business Stock ("QSBS") held for at least five years. For shares acquired after July 4, the new rules have expanded the definition of a Qualified Small Business to cover larger startup corporations, increased the maximum amount of gain eligible for exclusion, and included a phase in period that allows a portion of gain to be excluded for stock held for less than five years.

Expanded Definition of Qualified Small Business Stock

In order to qualify as QSBS, shares must be stock in an active C Corporation which were received by a taxpayer at original issue for money, property, or services. For the gain exclusion to apply, the issuing corporation must have been classified as a Qualified Small Business at all times between August 10, 1993 and the date of issuance of the shares to the taxpayer.

For QSBS shares issued on or before July 4, 2025, a Qualified Small Business includes corporations with aggregate gross assets below $50 million.

For QSBS shares issued after July 4, 2025, a Qualified Small Business now includes corporations with aggregate gross assets of up to $75 million, as adjusted by inflation. 

Increased Maximum Amount of Gain Eligible for Exclusion

For QSBS shares issued on or before July 4, 2025, taxpayers disposing of QSBS are eligible to exclude the greater of: (i) $10 million (as reduced by prior QSBS gains excluded from the same issuing corporation), or (ii) 10 times the taxpayer's adjusted basis in the QSBS being sold.

For QSBS shares issued after July 4, 2025, taxpayers disposing of QSBS are now eligible to exclude the greater of: (i) $15 million (as reduced by prior QSBS gains excluded from the same issuing corporation), or (ii) 10 times the taxpayer's adjusted basis in the QSBS being sold.

Inclusion of Phase In Period for Stock Sold Prior to Five Years

As under current law, QSBS acquired after July 4, 2025 will still be required to be held for at least five years in order to qualify for the 100% gain exclusion on a final disposition of shares. However, the new OBBBA rules create two additional partial gain exclusions allowable for QSBS shares acquired after July 4, 2025 which are disposed of after holding periods of only three or four years.

For QSBS shares issued after July 4, 2025 and held for three years, the new rules allow for a 50% gain exclusion on the sale of the shares, with the remaining 50% of gain being taxed at a 28% rate, plus up to 3.8% of potential NIIT Medicare taxes (for an overall potential maximum tax rate of 15.9% on the entire sale of QSBS shares).

For QSBS shares issued after July 4, 2025 and held for four years, the new rules allow for a 75% gain exclusion on the sale of the shares, with the remaining 25% of gain being taxed at a 28% rate, plus up to 3.8% of potential NIIT Medicare taxes (for an overall potential maximum tax rate of 7.95% on the entire sale of QSBS shares).