New Law Raises Qualified Small Business Stock Exclusion to $15 Million, Introduces Tiered 3-Year Benefit

Washington D.C. – The United States has enacted significant changes to its Qualified Small Business Stock (QSBS) rules, aiming to accelerate wealth creation for founders and incentivize investment in early-stage companies. The updates, part of the "One Big Beautiful Bill Act" signed into law by President Trump on July 4, 2025, introduce a higher gain exclusion limit and more flexible holding periods for eligible stock. These revisions are designed to make it faster and more attractive for investors to realize tax-free gains.

Under the revised Section 1202 of the Internal Revenue Code, the per-issuer capital gains exclusion cap has been increased from $10 million to $15 million. Additionally, the gross asset limit for a company to qualify as a "qualified small business" has been raised from $50 million to $75 million, expanding the pool of eligible startups. These changes apply to stock issued after July 4, 2025, and both caps will be indexed for inflation starting in 2027.

A notable reform is the introduction of tiered exclusion percentages for shorter holding periods, a departure from the previous five-year minimum. Investors can now exclude 50% of capital gains after holding qualified stock for three years, and 75% after four years. The full 100% exclusion remains available for stock held for five years or more, providing greater liquidity and flexibility for early exits.

The new legislation reinforces America's commitment to fostering a favorable environment for startups, complementing the existing 21% corporate tax rate. As stated by David J Phillips in a recent tweet, these changes collectively "handed founders a tax break to build wealth, fast," highlighting the $15 million QSBS limit, partial gains at 3-4 years, and the $75 million asset cap. The aim is to channel more capital into innovative small businesses, supporting job creation and economic growth.

Experts suggest these enhancements will significantly impact investment strategies for venture capitalists, angel investors, and founders. The increased caps and reduced holding periods are expected to broaden the appeal of QSBS, potentially leading to more robust funding rounds and earlier liquidity opportunities for qualifying companies and their stakeholders. The changes mark the most substantial overhaul of QSBS rules in over a decade, signaling a strategic move to boost the startup ecosystem.