QSBS After OBBBA: New Section 1202 Rules for 2026
OBBBA overhauled QSBS for stock issued after July 4, 2025. Tiered exclusion, $15M cap, $75M asset ceiling. What founders need to know now.
The most significant change to small business capital gains taxation in over a decade went into effect on July 4, 2025, and most founders have not updated their planning. The One Big Beautiful Bill Act (OBBBA, P.L. 119-21), signed into law on July 4, 2025, overhauled Section 1202 of the Internal Revenue Code, the provision governing qualified small business stock (QSBS). The changes apply only to stock issued after July 4, 2025. Pre-existing QSBS follows the old rules. That distinction is the single most important thing founders and early employees need to understand.
What Changed Under OBBBA
The old Section 1202 offered a flat 100% exclusion on QSBS gains for stock acquired after September 27, 2010, held for at least five years, subject to the greater of $10 million or 10x the shareholder’s adjusted basis. OBBBA replaced this structure with a tiered system for stock issued after July 4, 2025.
| Feature | Pre-OBBBA (Stock Issued Before 7/4/2025) | Post-OBBBA (Stock Issued After 7/4/2025) |
|---|---|---|
| Exclusion at 3 years | Not available (5-year minimum) | 50% of gain excluded |
| Exclusion at 4 years | Not available | 75% of gain excluded |
| Exclusion at 5 years | 100% of gain excluded | 100% of gain excluded |
| Per-issuer gain cap | Greater of $10M or 10x basis | $15,000,000 (inflation-indexed post-2026) |
| Gross-asset ceiling | $50,000,000 | $75,000,000 (inflation-indexed post-2026) |
| C corporation required | Yes | Yes |
| Active business test | Yes (80% of assets) | Yes (80% of assets) |
The tiered exclusion is the headline change. Under the old rules, if you sold QSBS before the five-year mark, you received zero exclusion. Under OBBBA, you receive partial benefit starting at three years. This matters for founders who face liquidity events, acquisitions, or secondary sales before the five-year hold matures.
The Per-Issuer Cap Increased to $15 Million
OBBBA raised the per-issuer gain cap from the greater of $10 million or 10x adjusted basis to a flat $15 million per issuer, indexed for inflation starting in 2027. The “per issuer” language is critical: the cap applies per company, not per taxpayer. A founder who holds QSBS in three separate qualifying companies has three separate $15 million exclusion caps.
For a married couple filing jointly, the exclusion is per shareholder. If both spouses hold QSBS in the same company (each having acquired their shares directly from the issuer in exchange for money, property, or services), each spouse has a separate $15 million cap.
The inflation indexing means the $15 million cap will adjust annually starting with 2027 returns, based on the chained CPI under Section 1(f)(3). The actual indexed figure for 2027 will be published by the IRS in late 2026.
The Gross-Asset Ceiling Rose to $75 Million
To qualify as a “qualified small business,” the issuing C corporation must have aggregate gross assets of $75 million or less at all times from inception through the date the stock is issued. Under the old rules, the ceiling was $50 million. OBBBA raised it by 50%, expanding the pool of eligible companies.
Gross assets include cash, property (at adjusted basis), and any other assets on the corporation’s books. The test is cumulative and point-in-time: the corporation must have been at or below $75 million at every moment from its formation through the stock issuance date. A company that crossed $50 million in 2023 but stayed under $75 million still qualifies for stock issued after July 4, 2025.
What Did Not Change
Several core QSBS requirements remain the same under OBBBA:
- C corporation only. S corporations, LLCs, partnerships, and sole proprietorships do not qualify. If you are currently an S corp or LLC, converting to a C corporation before issuing new shares may start the QSBS clock, but the conversion itself has tax consequences that require careful planning.
- Active business test. At least 80% of the corporation’s assets (by value) must be used in the active conduct of a qualified trade or business during substantially all of the holding period. Certain industries are excluded: health, law, engineering, architecture, accounting, actuarial science, performing arts, athletics, financial services, brokerage, and any business where the principal asset is the reputation or skill of employees.
- Original issuance. The stock must be acquired directly from the corporation in exchange for money, property (not stock), or services. Stock purchased on the secondary market does not qualify.
- Section 1045 rollover. Gain from QSBS held at least six months can be rolled over into new QSBS within 60 days under Section 1045, deferring the gain. This provision was not modified by OBBBA.
Pre-7/4/2025 Stock vs. Post-7/4/2025 Stock
This is where planning gets granular. The effective date creates a bifurcated system:
Stock issued before July 4, 2025 remains under the old Section 1202 rules. If you already hold QSBS acquired before that date, your exclusion is still 100% after five years, your per-issuer cap is the greater of $10 million or 10x basis, and the gross-asset ceiling was $50 million at issuance. OBBBA did not retroactively change these terms.
Stock issued after July 4, 2025 falls under the new tiered system. The three-year partial exclusion, the $15 million cap, and the $75 million ceiling all apply.
If you received stock grants before and after the cutoff from the same company, you hold two tranches with different rules. Each tranche’s exclusion is calculated separately. This is not hypothetical: any startup that issued founder shares before OBBBA and then raised a post-OBBBA round has created exactly this situation.
| Tranche | Holding Period | Exclusion | Cap |
|---|---|---|---|
| Pre-7/4/2025 shares | Must hold 5 years | 100% | Greater of $10M or 10x basis |
| Post-7/4/2025 shares (held 3 years) | 3 years | 50% | $15M per issuer |
| Post-7/4/2025 shares (held 4 years) | 4 years | 75% | $15M per issuer |
| Post-7/4/2025 shares (held 5 years) | 5 years | 100% | $15M per issuer |
The Planning Implications
Accelerated liquidity events. The tiered exclusion means founders no longer face an all-or-nothing cliff at year five. A founder who sells post-OBBBA QSBS at the three-year mark excludes 50% of the gain. On a $10 million gain, that is a $5 million exclusion, saving roughly $1,190,000 in federal capital gains tax at the 23.8% combined rate (20% LTCG + 3.8% NIIT).
Entity conversion timing. Companies currently operating as S corporations or LLCs that are considering a C corporation conversion should evaluate whether issuing new shares after July 4, 2025 captures the enhanced OBBBA terms. The conversion itself triggers Section 357 and Section 351 considerations that must be modeled before acting.
State tax interaction. Virginia conforms to the federal Section 1202 exclusion. Some states do not. California, for example, does not recognize the QSBS exclusion at the state level. Founders in non-conforming states owe state capital gains tax on the full gain regardless of the federal exclusion. Virginia residents benefit from full conformity.
What to Watch
The inflation indexing of the $15 million cap and $75 million ceiling begins in 2027. The IRS will publish the indexed figures in Revenue Procedure form, likely in the fourth quarter of 2026. We believe the OBBBA changes make QSBS planning more flexible and more accessible than at any point since Section 1202 was enacted in 1993. The tiered exclusion, in our view, is the most meaningful improvement because it eliminates the five-year cliff that forced founders into binary hold-or-sell decisions.
For founders holding pre-OBBBA stock, nothing changes. Hold for five years, claim 100%. For anyone issuing or receiving stock after July 4, 2025, the new rules open a three-year pathway that did not exist before.
Ferrante Capital LLC is not a law firm or CPA firm. This content is educational and does not constitute tax, legal, or investment advice. Consult a qualified tax professional before making decisions about QSBS eligibility, entity conversion, or stock disposition. Please consult a qualified financial professional before making investment decisions.
Related reading:
- Tax-Loss Harvesting: How to Turn Losses Into Tax Savings
- Roth vs. Traditional IRA: Which Is Right for You?
- The Year-Three Tax Cliff After Losing a Spouse
Ferrante Capital LLC is a registered investment adviser. This content is for educational purposes only and does not constitute investment advice or a recommendation to buy or sell any security.
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