As part of the newly enacted One Big Beautiful Bill Act (the OBBBA),1 Congress adopted the first substantive amendments to Section 12022–which prescribes the qualified small business stock (QSBS) rules–in over a decade. The OBBBA amended several portions of Section 1202, including:
- Gain from the sale of QSBS held for less than five years can now be partially excluded from gross income if held for at least three years.
- The $10 million per-shareholder limitation on gain exclusion is increased to $15 million and is now adjusted annually for inflation.
- The aggregate gross assets of a corporation to be a qualified small business is increased from $50 million to $75 million and is now adjusted annually for inflation.
In general, the new rules appear to be effective for stock issued on or after July 5, 2025.
I. Decrease in QSBS Holding Period
Under Section 1202, as in effect before the OBBBA, QSBS must be held by a taxpayer for a minimum of five years to receive the exclusion from the gains recognized on the sale of the QSBS. Thus, absent a complying “rollover” under Section 1045, any QSBS purchased before July 5, 2025, and sold before meeting the five-year holding period in a taxable sale, would result in the taxation of all gain.
The OBBBA provides that for stock acquired on or after July 5, 2025, gain realized on the sale of QSBS is excludable from taxable income on the following scale, depending on the holding period of the QSBS:
- QSBS held for at least three years – 50% exclusion
- QSBS held for at least four years – 75% exclusion
- QSBS held for at least five years – 100% exclusion.
II. Increase in Pre-Shareholder Limitation on QSBS Exclusion
Under Section 1202, as in effect before the OBBBA, each holder of QSBS can only exclude the greater of $10 million or 10 times of their adjusted basis in their QSBS. For example, if a taxpayer's adjusted basis in their QSBS was $5 million, they can exclude up to $50 million of gain. If the taxpayer's adjusted basis was $500,000, only up to $10 million of gain could be excluded.
The OBBBA provides that for stock acquired on or after July 5, 2025, the limitation on exclusion of gain is now the greater of $15 million or 10 times tax basis. In the previous example, a taxpayer with a $500,000 tax basis in their QSBS could exclude up to $15 million of gain (assuming a five-year holding period).
Additionally, under Section 1202 as in effect before the OBBBA, the $10 million limit was fixed since enactment. Under the OBBBA, the new $15 million is only a baseline for 2025 and 2026. For every tax year thereafter, the limitation is adjusted for inflation.
III. Increase in Aggregate Gross Assets Allowed for a Qualified Small Business
Under Section 1202 as in effect before the OBBBA, a corporation is only considered a qualified small business if its “aggregate gross assets” do not exceed $50 million (including any proceeds received from the issuance of the QSBS).
As amended, the aggregate gross asset limit for a corporation to qualify as a qualified small business is increased to $75 million for stock purchased on or after July 5, 2025. This threshold also is increased for inflation after 2026.
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The OBBBA did not change other requirements for QSBS that must continue to be met. For example: (1) the issuing company must be taxed as a C corporation; (2) the issuing company must continuously operate a qualifying trade or business, which generally excludes service businesses; (3) the taxpayer must purchase the stock directly from the company; and (4) the company generally cannot redeem more than a de minimis amount of stock within a two-year window beginning one year before the QSBS issuance.
Footnotes
1. H.R. 1, 119th Congress, Pub. L. No. 119-21, 139 Stat. ___ (2025)
2. Unless otherwise noted, all section references are to the Internal Revenue Code of 1986, as amended.
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