New Tiered Benefits: The 2025 Updates to the QSBS Exclusion Explained
Posted on August 05, 2025
The Qualified Small Business Stock (QSBS) exclusion under Internal Revenue Code (IRC) Section 1202 offers the potential for significant capital gains tax savings. QSBS rules originally came into effect in 1993, and since then have undergone periodic updates intended to keep pace with changes in both the tax code and the entrepreneurial landscape.
If you want to understand how these changes could affect your tax strategy, Topel Forman’s tax professionals
can help you navigate the latest QSBS updates and maximize available exclusions.
The most recent changes were introduced through the budget reconciliation bill (H.R. 1), better known as the “One Big Beautiful Bill Act” (“OBBBA”), enacted on July 4, 2025. While most of the QSBS exclusion’s core rules remain unchanged, the OBBBA expands the benefits and usability for a broader group of entrepreneurs and investors. For example, more businesses can now be eligible as “qualified small businesses,” while shorter holding periods may encourage investors who need earlier access to capital.
Recap of the Pre-2025 QSBS Exclusion Rules
Before addressing the 2025 updates to the exclusion under IRC 1202, it is important to note that the fundamental structure of the QSBS exclusion has not changed.
Non-corporate taxpayers, such as individuals and trusts subject to U.S. federal income tax, remain the only taxpayers eligible to claim the QSBS exclusion. Corporate shareholders and foreign entities still do not qualify. Additionally, the stock must still be issued directly by a domestic C-Corporation in exchange for cash, property, or services; purchasing shares on the secondary market continues to disqualify the stock from QSBS treatment.
Generally, IRC Section 1202 required that a taxpayer must hold the stock for more than five years from the date of acquisition to be eligible for the gain exclusion. The holding period begins on the date the stock is acquired, which is typically the date of original issuance, or, for stock received as compensation, the date it is included in income under IRC Section 83 (such as the effective date of a Section 83(b) election).
A further limitation in addition to the 5-year holding period was that the QSBS exclusion was capped per issuer at the greater of $10 million or 10 times the taxpayer’s adjusted basis. For some exits of successful startups, that cap could be a limiting factor in total potential tax savings.
Moreover, the issuing company had to have aggregate gross assets of $50 million or less at the time of (and immediately after) issuance. Additionally, there was an “active business requirement,” under which at least 80% of the corporation’s assets needed to be dedicated to operating a qualified trade or business for most of the stock’s holding period.
As mentioned previously, the foundation of the QSBS exclusion—who qualifies, which companies are eligible, and how the exclusion operates—remains largely the same as in years past. The OBBBA introduces new, incremental benefits, including a tiered exclusion system, expanded per-issuer limits, and a higher company asset ceiling, which will be discussed next.
Key Updates from the 2025 OBBBA Legislation
The OBBBA introduces a new tiered structure for holding periods, from the single five-year threshold mentioned above, to a three-tiered system. Under the new rules, taxpayers can exclude 50% of gain on shares held for at least three years, 75% of gain on shares held for at least four years, and 100% of gain on shares held for five or more years. Notably, these revised exclusion tiers only apply to stock originally issued on or after July 4, 2025. Additionally, the Act clarifies that gains excluded under these new three- or four-year thresholds will not be counted as a preference item for AMT if the stock was acquired after September 27, 2010.
Before these new tiers, a five-year holding period could feel quite lengthy for some early-stage equity holders. Now, the sooner (three- and four-year) thresholds allow accelerated access to partial exclusions if an exit or major liquidity event arises. While many will still aim for the full 100% exclusion at five years, this tiered system could help with strategic planning along the way.
Additionally, the per-issuer limit grows from $10 million to $15 million, and there will be an annual inflation adjustment going forward. This means long-term investments in successful businesses now have a chance for a bigger tax break.
Finally, the issuing company threshold moves up from $50 million to $75 million—again subject to ongoing inflation adjustments. Practically, the result is a broader set of companies whose stock may qualify as QSBS for their shareholders. The following chart summarizes the OBBBA updates:
| Feature | Pre-2025 Rules | Post-2025 OBBBA Updates |
|---|---|---|
| Minimum Holding Period | 5 years (100%) | 3 years (50%), 4 years (75%), 5 years (100%) |
| Per-Issuer Limit | $10M or 10× basis | $15M or 10× basis, inflation-indexed |
| Asset Threshold | $50 million | $75 million, inflation-indexed |
| AMT Preference | Excluded for post-2010 stock | Same; clarified for new 3- and 4-year tiers |
Conclusion
By lowering the bar on holding periods and increasing both the per-issuer limit and gross asset threshold, the OBBBA widens the door for more entrepreneurs, employees, and investors to capture QSBS benefits. Topel Forman is ready to guide individuals through these new QSBS parameters. If you have questions about how these proposed changes may impact your tax position, contact our tax services team to discuss your specific situation and opportunities.
