QSBS Changes Under the 2025 Tax Law: 3-Year Tiers, $15M Cap and the $75M Asset Test

Three things changed for stock acquired after July 4, 2025: a shorter holding period with partial exclusions, a higher per-issuer cap, and a higher gross asset ceiling for the issuing company. P.L. 119-21 made these changes to IRC Section 1202, and they apply based on when you acquired the stock, not when the company was formed.

The core qualification rules did not change. The issuer must be a domestic C corporation, you must acquire the stock at original issuance for money, property or services, the company must use at least 80% of its assets in an active qualified business during substantially all of your holding period, and excluded fields (professional services, finance, hospitality and a few others) still disqualify. Our explainer on what QSBS is covers those basics in detail.

After three years you exclude 50% of the gain, after four years 75%, and after five years 100%. The part of the gain you do not exclude is Section 1202 gain, taxed at a maximum federal rate of 28% rather than the usual 20% long-term rate, and it can also be subject to the 3.8% net investment income tax.

A worked example for a hypothetical founder who sells $10 million of post-July 2025 QSBS with near-zero basis:

• Sold after 3 years: $5,000,000 excluded, $5,000,000 taxable. At 28% plus 3.8%, federal tax is about $1,590,000.
• Sold after 4 years: $7,500,000 excluded, $2,500,000 taxable. Federal tax is about $795,000.
• Sold after 5 years: all $10,000,000 excluded. Federal tax is zero.
• No QSBS at all: $10,000,000 at 20% plus 3.8%, about $2,380,000.

The three-year tier is real money, but it is not a substitute for waiting. In this example, holding one more year saves roughly $795,000. The partial exclusions can also carry alternative minimum tax consequences, so have your preparer model AMT before you agree to a sale price that assumes a 50% or 75% exclusion.

The tiers matter most for acquisitions. A buyer offering cash in year three or four is now a partial QSBS event, not a total loss of the benefit, which changes how founders should weigh an early exit against rolling equity.

For stock acquired after July 4, 2025, the excluded gain per issuer is capped at the greater of $15 million (reduced by gain you already excluded from that company in prior years) or 10 times your aggregate adjusted basis in the stock you sold that year. The $15 million figure is indexed for inflation for tax years beginning after 2026. Married individuals filing separately get half.

Founders who bought stock for fractions of a cent rely on the dollar cap. Investors who paid real money often get more from the 10x basis test. An angel who invested $2 million has a potential cap of $20 million, which beats $15 million.

If you hold both old and new stock in the same company (say founder shares from 2022 and an option exercise in 2026), the caps do not simply add together. The prior-year exclusions reduce the dollar cap, and the order in which you sell lots matters. Map your lots before a liquidity event, not after.

A company can issue QSBS only if its aggregate gross assets do not exceed $75 million at all times before the issuance and immediately after it. The test uses cash plus the adjusted tax basis of other assets, not your post-money valuation. Property contributed to the corporation counts at its fair market value when contributed.

The practical consequence is that cash from a priced round counts the moment it lands. A company with $30 million on the balance sheet that closes a $50 million Series B crosses $75 million, and stock issued after that close (including option exercises) is no longer QSBS. Stock issued before the close keeps its status, because the test is applied at issuance.

The $75 million figure is indexed for inflation after 2026. Do not plan around the indexed amount until the IRS publishes it.

Two things to document now: the gross asset figure on each issuance date, and the board minutes or closing dates that prove the order of events. A diligence team at exit will ask for both.

Stock acquired on or before July 4, 2025 is governed by the prior version of Section 1202. You need a five-year hold for the 100% exclusion (for stock acquired after September 27, 2010), the per-issuer cap is the greater of $10 million or 10 times basis, and the issuer had to meet the $50 million gross asset test when the stock was issued. There is no 50% or 75% tier for this stock. Sell at four years and eleven months and you get nothing under Section 1202, though a Section 1045 rollover may still help.

Some other items did not change for either group:

• State treatment. California does not follow the federal QSBS exclusion, so California residents pay state tax on the gain. New York generally follows federal treatment; see our New York QSBS post.
• The C corporation requirement. S corporation and LLC interests are not QSBS.
• The redemption rules that can taint stock issued around a company buyback.

The acquisition date drives which regime applies. Getting this wrong is the most common QSBS mistake we see in cap tables built around the July 2025 cutoff.

• Stock options: you acquire the stock when you exercise, not when the option was granted. A 2023 grant exercised in 2026 is new-regime stock with a holding period starting in 2026.
• Early exercise with an 83(b) election: you acquire the restricted stock on the exercise date, and the 83(b) election starts your holding period then.
• Restricted stock without an 83(b): the holding period generally starts at vesting, which can push vested tranches into the new regime.
• SAFEs and convertible notes: the stock is generally acquired when the instrument converts. A SAFE signed in early 2025 that converted at a 2026 priced round produces new-regime shares. Whether any SAFE holding period tacks on is a technical question with no settled answer, so do not assume it.
• RSUs: stock is acquired at settlement, which in private companies is often a liquidity event, so RSU shares rarely reach even the three-year tier.

The new rules create a few planning moves worth discussing with counsel and your tax advisor.

Stacking. The cap applies per taxpayer, per issuer. Gifting QSBS to family members or to properly structured non-grantor trusts can give each recipient its own cap, and gifted stock keeps the donor's holding period and QSBS character. This works best early, while the stock is worth little and gift tax exposure is low. A $15 million cap makes each extra taxpayer worth more than before.

Issuance timing. If a large round will push gross assets past $75 million, consider having founders and early employees exercise options before the close. Exercising costs money and may create AMT on ISOs, so this is a trade-off, not a reflex.

LLC conversions. If you started as an LLC and convert to a C corporation, the shares you receive are acquired at conversion. Your basis for QSBS purposes is the fair market value of what you contributed, and only appreciation after the conversion can be excluded. Converting after July 4, 2025 means new-regime stock, a $75 million asset test measured at that value, and a holding period that starts on the conversion date. If the LLC is already worth a lot, the 10x basis test can work in your favor.

Build the file now, while the facts are fresh. At exit, buyers and their counsel will want proof, and reconstructing it years later is expensive.

1. A lot-level ledger for each holder: acquisition date, how acquired, price paid, and whether an 83(b) was filed.
2. Gross asset calculations on each issuance date, tied to the balance sheet.
3. An annual active business test memo showing at least 80% of assets used in a qualified business.
4. Board consents and closing dates for every financing and any redemptions.
5. Copies of 83(b) elections with proof of timely filing.

The rules described here reflect Section 1202 as amended through October 2026. This is a summary, not tax advice for your specific facts. Founders approaching a sale should get a written QSBS analysis before signing a letter of intent.