QSBS 2.0: How OBBBA's Tiered Section 1202 Exclusion and $15 Million Cap Reward Founders and Investors

What Section 1202 does, and what changed

IRC § 1202 allows a noncorporate taxpayer to exclude gain on the sale of qualified small business stock (QSBS) held for more than five years. Under the rules in place before this summer, the exclusion was 100 percent for stock acquired after September 27, 2010; the excludable gain was capped at the greater of $10 million or ten times the taxpayer's basis in the stock; and the issuing C corporation's aggregate gross assets had to be $50 million or less at and immediately after the stock was issued.

The One Big Beautiful Bill Act (OBBBA), Public Law 119-21, signed July 4, 2025, reworked all three of those features — but only for stock acquired after July 4, 2025. The effective-date line is the single most important fact in the entire change.

The two regimes

Because the new rules apply only to newly acquired stock, founders and investors now operate under two distinct § 1202 regimes simultaneously.

Stock acquired on or before July 4, 2025 keeps the prior rules: all-or-nothing 100 percent exclusion at five years, a $10 million or ten-times-basis cap, and a $50 million gross-assets test. Nothing about that stock changed.

Stock acquired after July 4, 2025 falls under the new rules:

• A tiered exclusion based on holding period: 50 percent of gain if the stock is held at least three years, 75 percent if held at least four years, and 100 percent if held at least five years. This is the structural break from the old all-or-nothing design — partial exclusion is now available before the five-year mark.
• A per-issuer gain cap raised to the greater of $15 million or ten times basis, with the $15 million figure indexed for inflation after 2026.
• An aggregate gross-assets ceiling raised to $75 million, also indexed for inflation after 2026, expanding the universe of companies whose stock can qualify.

For the new partial-exclusion tiers, OBBBA also addressed the alternative minimum tax. The law amended IRC § 57(a)(7) to remove any AMT preference on the gain excluded under the new 50 and 75 percent tiers — a more favorable result than the older partial-exclusion regimes carried. The portion of gain that is not excluded remains "section 1202 gain," taxed at the maximum 28 percent rate rather than the ordinary 20 percent long-term capital gains rate, plus the net investment income tax where it applies.

Why the redesign matters for exit planning

The practical effect is to shorten the path to a meaningful exclusion and to raise the ceiling on what can be sheltered. Both change the calculus for founders and early investors.

The shortened path is the more striking change. Under the old rules, an exit before the fifth anniversary produced no § 1202 exclusion at all — the holding period was a cliff. Under the new tiers, a sale at three years excludes half the gain, and a sale at four years excludes three-quarters. For founders facing acquisition offers, or investors with liquidity needs, that converts a binary five-year wait into a graduated benefit. The decision to sell early no longer forfeits the entire exclusion.

The higher caps matter at the other end. The increase from a $10 million to a $15 million per-issuer gain cap raises the absolute amount of gain that can be excluded on a successful exit, and the increase in the gross-assets test from $50 million to $75 million means companies that would have outgrown QSBS eligibility under the old ceiling can now issue qualifying stock at a larger size. For a company raising capital and issuing stock after July 4, 2025, the larger asset test expands the window during which new issuances can qualify.

The planning discipline this requires

The existence of two regimes is the thing to manage carefully, because the rules that apply to a given block of stock depend on its acquisition date, and a single taxpayer may hold both kinds.

For stock already held — acquired on or before July 4, 2025 — the planning is unchanged: the five-year hold, the $10 million cap, and the $50 million test still govern. There is no benefit to mischaracterizing that stock as subject to the new rules; it is not.

For stock acquired after July 4, 2025, the new tiers and caps apply, and the holding-period analysis becomes more granular. Tracking acquisition dates precisely now has a direct tax consequence, because the difference between a three-year and a four-year hold is the difference between a 50 and a 75 percent exclusion. For investors building positions across multiple financings, and for founders receiving stock over time, the acquisition date of each block determines which regime — and within the new regime, which tier — applies.

A note of restraint on the arithmetic: practitioners have circulated blended effective-rate figures for the partial tiers, combining the exclusion percentage with the 28 percent rate on the taxable slice. Those are useful illustrations, but they are estimates, not statutory figures. The statutory facts are the ones to anchor on — the tiers, the caps, the asset test, the AMT treatment, and above all the July 4, 2025 dividing line.

Key takeaways

• OBBBA (Pub. L. 119-21) redesigned IRC § 1202 for qualified small business stock acquired after July 4, 2025; stock acquired on or before that date keeps the prior rules.
• New stock earns a tiered exclusion: 50 percent at three years, 75 percent at four years, and 100 percent at five years — partial exclusion is now available before five years.
• The per-issuer gain cap rose to the greater of $15 million or ten times basis, and the company gross-assets test rose to $75 million, both indexed after 2026.
• The new 50 and 75 percent tiers carry no AMT preference (via the § 57(a)(7) amendment); the non-excluded portion remains taxed at the 28 percent section 1202 rate.

Frequently asked questions

Do the new QSBS rules apply to stock I already own?

Only if you acquired it after July 4, 2025. Stock acquired on or before that date remains under the prior rules — 100 percent exclusion at five years, a $10 million cap, and a $50 million gross-assets test.

Can I get a partial exclusion if I sell before five years?

For stock acquired after July 4, 2025, yes — 50 percent of the gain is excludable at a three-year hold and 75 percent at a four-year hold, with full 100 percent exclusion at five years. For older stock, the five-year all-or-nothing rule still applies.

How much gain can I exclude now?

For qualifying stock acquired after July 4, 2025, the per-issuer cap is the greater of $15 million or ten times your basis, up from $10 million under the prior rules.

Bottom line

The § 1202 redesign rewards founders and early investors with earlier partial exclusions and higher ceilings — but only on stock acquired after July 4, 2025. The discipline this demands is precise acquisition-date tracking, because the regime and the tier that apply to each block of stock, and therefore the tax on its sale, depend on exactly when it was acquired.