QSBS After the 2025 Overhaul: The Founder's Guide to Section 1202 (2026)
OBBBA rewrote QSBS for stock issued after July 4, 2025: tiered holding periods, a $15M cap, a $75M asset ceiling. What qualifies and how much is tax-free.
Qualified Small Business Stock (QSBS) is the most powerful tax benefit in the startup ecosystem: under IRC Section 1202, a founder or early investor can exclude millions of dollars of gain from federal tax entirely. In 2025 it got materially better — and materially more complicated, because there are now two sets of rules depending on when your stock was issued.
This guide covers the current 2026 landscape: both vintages, what qualifies, and how the exclusion is actually computed.
The 2025 overhaul: two vintages
The One Big Beautiful Bill Act (OBBBA), signed July 4, 2025, created a second QSBS regime. The dividing line is the issuance date of your stock, tracked per block — a founder can hold both vintages in the same company and must account for each separately.
| Issued on/before Jul 4, 2025 | Issued after Jul 4, 2025 | |
|---|---|---|
| Holding period → exclusion | 5+ yrs → 100% (no exclusion below 5) | 3 yrs → 50%, 4 yrs → 75%, 5+ yrs → 100% |
| Per-issuer dollar cap | greater of $10M or 10× basis | greater of $15M or 10× basis (indexed from 2027) |
| Gross-assets ceiling | $50M | $75M (indexed from 2027) |
Two consequences worth internalizing:
- You cannot reset old stock into the new regime. Pre-enactment stock sold after July 4, 2025 still uses the $10M cap and the 5-year/100%-only rule. A stock-for-stock exchange or a §1045 rollover does not change the original acquisition date.
- The new tiers give partial liquidity earlier. Under the old rules, selling at year 4 meant zero exclusion. Post-OBBBA stock held 4 years gets 75% excluded — a real change for founders facing an earlier exit.
How the exclusion is computed
Two numbers interact:
- Exclusion percentage — set by your vintage and holding period (the table above).
- Per-issuer cap — the greater of the dollar cap or 10× your adjusted basis.
Excluded gain = the lesser of (exclusion % × total gain) and the cap. Whatever remains is taxable.
QSBS exclusion estimator
Federal §1202 only. Assumes the stock already qualifies (C-corp, qualified trade, gross-assets test met).
Enter your gain, basis, and holding period to estimate how much §1202 can exclude.
Estimate only, federal §1202 exclusion. Does not check eligibility (qualified trade, C-corp status, gross-assets ceiling) and does not include state tax — California, Pennsylvania and others do not conform and tax the gain in full. Confirm with your CPA.
For a founder with near-zero basis, the dollar cap binds: 10× of ~$0 is ~$0, so the $15M (or $10M) figure controls. The 10x-basis lever only matters when basis is high — an investor with $3M of basis gets a $30M cap, and 10x becomes the better number.
Eligibility — where most people fall out
The exclusion is worthless if the stock was never QSBS to begin with. All of the following must hold:
- Domestic C-corporation at issuance and during substantially all of the holding period. LLCs, partnerships, and S-corps do not issue QSBS — though converting to a C-corp can start the clock from the conversion.
- Original issuance: you acquired the stock directly from the company (for cash, property, or services), not on the secondary market.
- Gross-assets test: the company's aggregate gross assets were at or below the ceiling ($50M / $75M) at all times before, and immediately after, your stock was issued.
- Active business: at least 80% (by value) of the company's assets are used in the active conduct of a qualified trade or business.
Excluded businesses (the most common disqualifier)
Section 1202(e)(3) excludes entire fields. If the company's principal activity is any of these, the stock does not qualify regardless of size or holding period:
- Professional services: health, law, engineering, architecture, accounting, actuarial science, consulting, performing arts, athletics, financial services, brokerage
- Banking, insurance, financing, leasing, investing or similar
- Farming, mining/extraction, and hotels, restaurants, or similar hospitality businesses
- Any business whose principal asset is the reputation or skill of one or more employees
A SaaS or hard-tech startup typically qualifies. A fintech doing "financial services," a telehealth company doing "health," or a solo consultant's C-corp typically do not. This gating is fact-intensive — get a determination.
The tax on the rest, and the AMT footnote
The taxable portion (gain above the cap, or the non-excluded share at the 50%/75% tiers) is taxed at the 28% Section 1202 rate plus 3.8% NIIT — about 31.8% federally, not the 15%/20% long-term rate. The excluded portion is fully federal-tax-free and outside NIIT.
The old "7% AMT preference" on excluded QSBS gain only ever applied to stock issued before September 28, 2010. For any modern founder it is obsolete — OBBBA also removed any AMT preference for the new tiers.
State conformity will surprise you
QSBS is a federal exclusion. States decide separately:
- California does not conform — it taxes the full gain at up to 13.3%, even when 100% is excluded federally. For a California founder, "tax-free QSBS" can still mean a seven-figure state bill.
- Pennsylvania, Alabama, Mississippi also do not conform.
- New Jersey begins conforming in 2026.
Run your state separately. The calculator above is federal only.
Planning levers (advisor territory)
- §1045 rollover — held 6+ months but will miss the threshold? Reinvest proceeds into new QSBS within 60 days to defer; the holding period tacks. (Cannot convert vintages.)
- Stacking — because the cap is per-taxpayer-per-issuer, gifting QSBS to additional taxpayers (especially non-grantor trusts, which are separate taxpayers) can multiply the exclusion. Grantor trusts do not create an extra cap. Note: Treasury signaled in May 2026 it is reviewing aggressive stacking, and anti-abuse doctrines (§643(f), assignment of income) constrain last-minute structures. Strictly advisor-only.
Bottom line
If your stock was issued after July 4, 2025, you have a more generous and more flexible QSBS than any founder before you — up to $15M excluded per company, with partial exclusions starting at year 3. If it was issued earlier, the old $10M/5-year rule still governs that block. Either way, the exclusion is only real if the stock qualified at issuance, and your state may tax the gain regardless. Model the federal number above, then confirm eligibility and state treatment with your CPA.
This guide is informational only and is not tax advice. Sources: 26 USC §1202 · OBBBA, Pub. L. 119-21 §70431 (enacted July 4, 2025) · AICPA, The Tax Adviser (Nov 2025) · Perkins Coie, Grant Thornton, and Mintz OBBBA analyses. Reviewed by a licensed CPA on the Acorn 9 team.