QSBS Just Got a Major Upgrade: What Founders Need to Know

QSBS (Qualified Small Business Stock) is a federal tax provision under Section 1202 of the Internal Revenue Code that lets you exclude up to millions of dollars in capital gains when you sell stock in a qualifying small business.

If you’re a founder holding C-corp equity, QSBS is one of the most powerful tax benefits available to you. And as of July 2025, it just got significantly better.

The One Big Beautiful Bill Act, signed into law last summer, made three major changes to QSBS that every founder, early employee, and startup investor needs to understand. The holding period is shorter. The exclusion cap is higher. And the qualifying threshold is more generous.

Here’s what changed, who qualifies, and what you should do about it.

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What Changed in the One Big Beautiful Bill Act

The OBBBA made three meaningful updates to Section 1202. Each one independently makes QSBS more accessible. Together, they represent the biggest upgrade to startup tax benefits in over a decade.

1. Holding Period: 5 Years to 3 Years (Tiered)

Previously, you had to hold your qualifying stock for at least five years before you could exclude any gains. That’s a long time in the startup world.

Now, the holding period is tiered:

Holding Period	Exclusion
3 years	50% of gains excluded
4 years	75% of gains excluded
5+ years	100% of gains excluded

This is a big deal. If your startup gets acquired at year three, you’re no longer shut out entirely. You still get half the exclusion. At four years, you get 75%. And the full 100% exclusion now kicks in at five years, same as before, but the tiered structure means even earlier exits have meaningful tax benefits.

2. Asset Threshold: $50M to $75M

To qualify for QSBS, your company’s gross assets must be below a certain threshold at the time the stock is issued. That ceiling was $50 million. Now it’s $75 million.

This matters because many startups that raise a Series B or C were bumping up against the old limit. A company with $60M in gross assets after a fundraise would have disqualified new stock issuances entirely. Now there’s more room.

3. Gain Exclusion Cap: $10M to $15M (With Inflation Indexing)

The maximum gain you can exclude under QSBS was $10 million (or 10x your cost basis, whichever is greater). That cap is now $15 million per holder.

Even better, the new cap is indexed to inflation. It will adjust upward over time, which means the real value of the benefit won’t erode the way the old $10M cap did over the past two decades.

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Who Qualifies for QSBS

The core requirements haven’t changed. Your stock must meet all of these:

• C-corporation. The company must be a C-corp at the time the stock is issued. LLCs, S-corps, and partnerships don’t qualify. If you’re currently structured as an LLC, this is worth a conversation with your attorney.
• Gross assets under $75M. The company’s aggregate gross assets must not exceed $75 million at the time of stock issuance (and at all times before that). This is measured on a tax basis, not fair market value.
• Active business requirement. At least 80% of the company’s assets must be used in an active trade or business. Certain industries are excluded: hospitality, banking, farming, mining, and professional services like law and accounting.
• Held for 3+ years. Under the new rules, you need at least three years of holding to get any exclusion (50%), and four years for the full 100%.
• Original issuance. You must have acquired the stock directly from the company (at incorporation, through an option exercise, or similar). Stock purchased on the secondary market generally doesn’t qualify.

83(b) Elections Explained: Filing Early Is Even More Important Now

If you filed an 83(b) election when you received your shares, your holding period starts from the grant date. If you didn’t, it starts from the vesting date. With the holding period now at three to four years instead of five, filing your 83(b) on time is more important than ever.

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Why This Matters for Founders

Let’s make this concrete.

Say you founded a C-corp, received stock at incorporation worth essentially nothing, and four years later the company gets acquired. Your shares are worth $12 million at exit.

Before OBBBA: You’d need to have held for five years to exclude any gains, and the cap was $10M. At four years, you’d owe capital gains on the full $12M. That’s roughly $2.4M in federal taxes alone.

After OBBBA: At four years, you qualify for a 75% exclusion. On a $12M gain, $9M is excluded and $3M is taxable. That’s roughly $600K in federal taxes instead of $2.4M. Hold for one more year (five total) and the full 100% exclusion applies, bringing your tax to $0.

Even at three years of holding, you’d exclude 50% of gains. On a $12M exit, that’s $6M excluded and roughly $1.2M in taxes instead of $2.4M.

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States That Don’t Conform

Here’s the catch. Not every state follows federal QSBS rules. If you live in one of these states, you may owe state capital gains taxes even if your federal bill is zero:

• California. Does not conform to Section 1202 at all. You’ll owe California capital gains (up to 13.3%) on the full amount.
• Alabama. Does not conform.
• Mississippi. Does not conform.
• Pennsylvania. Does not conform.

Note: New Jersey enacted QSBS conformity in June 2025, effective for tax years beginning January 1, 2026.

California is the most impactful here. If you’re a founder in San Francisco sitting on $10M in QSBS-eligible gains, you could owe $0 federally and $1.3M to California.

Some founders relocate before an exit to avoid this. That’s a personal decision, but it’s one you should make deliberately, not discover after the fact.

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What You Should Do Now

1. Check Your Entity Structure

QSBS only applies to C-corps. If you’re an LLC (even one taxed as an S-corp), you don’t qualify. If you’re pre-revenue and considering your structure, the QSBS benefit is a strong argument for C-corp incorporation. But there are tradeoffs. Talk to a tax advisor.

How to Value a Startup for Equity

2. Track Your Holding Period

With the new tiered system, the difference between 2 years 11 months and 3 years 1 month is the difference between $0 and millions in tax savings. Know your dates. If you’re approaching an exit, the holding period should be part of the negotiation timeline.

3. File Your 83(b) Election

If you receive restricted stock, file your 83(b) election within 30 days. This starts your QSBS holding clock at the grant date instead of the vesting date. On a four-year vesting schedule, that’s the difference between qualifying at year four (grant date + 4 years) and year eight (last vesting date + 4 years).

4. Document Your Gross Assets

If your company is approaching the $75M threshold, keep records. The qualification is based on gross assets at the time of issuance, so the timing of when you issue stock relative to when you close a fundraise can matter.

5. Consider C-Corp Conversion

If you’re currently an LLC and planning to raise institutional money, the combination of investor preference and QSBS benefits makes a strong case for conversion. Just make sure you do it before the company’s assets exceed $75M.

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The Bottom Line

QSBS was already one of the best tax benefits available to startup founders. The One Big Beautiful Bill Act made it meaningfully better. A shorter holding period, a higher exclusion cap, and a more generous asset threshold all work in your favor.

But it only works if your company is structured correctly and you’ve done the paperwork. Check your entity type. File your 83(b). Track your dates. And if you’re in California, factor state taxes into your planning.

Equity Matrix helps you track your equity from day one, so when QSBS qualification matters, you have the records to prove it.

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FAQ

Does my LLC qualify for QSBS?

No. QSBS under Section 1202 only applies to C-corporations. If you’re structured as an LLC (even one taxed as a corporation), you don’t qualify. You’d need to convert to a C-corp, and the stock must be issued while the company is a C-corp with gross assets under $75M.

What if I’m in California?

California does not conform to Section 1202. Even if your gains are fully excluded at the federal level, you’ll owe California state capital gains tax (up to 13.3%) on the full amount. This is one reason some founders consider relocating before a liquidity event. Plan for this early.

Can I claim QSBS retroactively on stock I already hold?

The new rules apply to stock acquired after the enactment date (July 2025) for the updated caps and thresholds. However, the reduced holding period provisions apply to sales occurring after enactment, regardless of when the stock was acquired. If you’ve been holding qualifying stock for four years, you may now be eligible for the full exclusion even if you acquired the shares before the law changed. Confirm with a tax advisor based on your specific dates.