QSBS After OBBBA: What the One Big Beautiful Bill Changed for Section 1202

What OBBBA changed at a glance

Change 1: Exclusion cap raised from $10M to $15M

Under pre-OBBBA law, the §1202 exclusion was capped at the greater of $10 million per issuer or 10 times your adjusted basis in the stock. For a founder with a very low cost basis — say, $5,000 in founder shares — the 10× cap equaled $50,000, so the $10M flat cap governed. For an investor who paid $2M in a Series A, the 10× cap equaled $20M and would typically govern instead.²

OBBBA raises the flat cap to $15 million for stock acquired after July 4, 2025, with annual inflation adjustments beginning in 2027.¹ The 10× basis alternative cap remains in place and continues to apply when it yields a higher exclusion.

For founders holding stock above the $10M threshold — common in venture-backed exits — the $5M increase in the flat cap represents a meaningful additional tax-free dollar amount.

Change 2: New tiered holding period for post-OBBBA stock

This is the most operationally significant change in OBBBA for founders approaching a liquidity event. Under pre-OBBBA rules, there was no partial exclusion — you either held for more than five years and got 100% exclusion (for post-2010 stock), or you had no §1202 benefit at all and could only consider a §1045 rollover to defer the gain.

For stock acquired after July 4, 2025, OBBBA introduces graduated exclusions:¹

The 28% rate trap at 3- and 4-year exits

The tiered structure introduces a planning trap that does not exist for pre-OBBBA stock. When you exit at the three- or four-year mark and exclude 50% or 75% of your gain under §1202, the remaining unexcluded gain is taxed at 28% — not at the standard long-term capital gain rates of 15% or 20%.³ This is because §1(h)(7) of the Internal Revenue Code applies the 28% "collectibles" rate to the taxable portion of §1202 gain.

For most founders, waiting for the 5-year full exclusion will still maximize after-tax proceeds — especially in a conforming state. The tiered system creates optionality rather than a clear "exit early" signal. Whether to exit at 3 or 4 years depends on deal certainty, time value, and whether the company's valuation trajectory is likely to change the math.

When an early exit might still make sense

Despite the 28% trap, there are scenarios where a 3- or 4-year exit with partial exclusion beats waiting:

• The company is in a declining valuation trend and an LOI or tender offer is available now
• Liquidity is needed for estate planning, gifting, or a major personal obligation before year 5
• State conformity is irrelevant (the founder is in a non-conforming state like California, where 100% of the gain is taxed at 13.3% regardless)
• The §1045 rollover is not available or practical

A fee-only financial advisor who specializes in founder liquidity can model the net after-tax proceeds under different exit timelines and help you decide whether partial exclusion now beats full exclusion later — given your personal situation.

Change 3: Gross assets threshold raised from $50M to $75M

Section 1202 requires that the corporation's aggregate gross assets not exceed the statutory threshold at the time the stock is issued. Under pre-OBBBA law, that threshold was $50 million — meaning companies that had raised through a healthy Series A or a meaningful Series B could no longer issue QSBS. The issuer's gross assets at closing controlled eligibility, and many later-stage companies crossed $50M before issuing all their employee stock.

OBBBA raises the gross assets threshold to $75 million for stock issued after July 4, 2025, with inflation indexing beginning in 2027.¹

What this means for issuers and investors

The $75M threshold allows more companies to issue qualifying QSBS before the window closes. Companies that previously crossed the $50M line after a Series A or early Series B can now issue QSBS to new employees and early investors — provided all other §1202 requirements are met at issuance.

For angel investors and institutional early-stage investors, the higher threshold means more of the companies you're investing in will be QSBS-eligible at the time of your investment. The same original issuance requirement still applies — you must acquire the stock directly from the company, not in a secondary market transaction.

What OBBBA did NOT change

For all the changes above, several core §1202 requirements remain exactly as before. These apply equally to pre- and post-OBBBA stock:

• C-Corporation requirement. The issuer must be a domestic C-Corp at the time of issuance and for substantially all of the holding period. LLCs, S-Corps, and other pass-through entities cannot issue QSBS directly. (An LLC converting to a C-Corp via check-the-box or statutory conversion can start the clock on newly issued shares.)
• Original issuance requirement. Shares must be acquired directly from the corporation in exchange for money, property, or services. Secondary market purchases do not qualify.
• Active business test and excluded industries. The 80% active business test under §1202(e) and the excluded industries list (health, law, financial services, consulting, and others) remain unchanged.
• 10× adjusted basis alternative cap. Still in place — the higher of $15M or 10× basis governs for post-OBBBA stock.
• Per-issuer limitation. The cap is per taxpayer, per issuer. A single shareholder holding QSBS in two different companies has two separate caps.
• State conformity. Non-conforming states — California, Pennsylvania, Alabama, Mississippi — still do not recognize the §1202 exclusion. New Jersey conformed effective January 1, 2026 under A4455. OBBBA did not change state conformity.

Planning implications by founder type

You hold stock issued on or before July 4, 2025

Your exclusion is governed by pre-OBBBA rules. This is actually well-understood territory. If your shares were issued after September 27, 2010, you have 100% exclusion on sale after a 5-year hold, capped at the greater of $10M or 10× basis. OBBBA does not add new requirements or restrictions for your stock — the rules simply did not change for stock already issued.

The planning agenda for you is the same as before: confirm holding period, qualify the shares, model gifting to multiply the cap, understand state tax exposure, and coordinate the sale timeline with your existing exclusion.

Your company issued stock after July 4, 2025

You are under the new OBBBA regime. The 50%/75%/100% tier structure means you have partial tax benefit after three years — but you should run the net math before treating a 3-year exit as equivalent to a 5-year exit. In most cases, the 28% rate on unexcluded gain and the loss of the state exclusion (in conforming states) means waiting for 100% is still the right call when the company's trajectory supports it.

The higher $75M gross assets threshold also means your company can issue QSBS to later-hired employees at higher valuations than before, which affects stock option planning and equity compensation design.

You are an angel investor or early-stage fund

The $75M threshold expansion means more of your portfolio companies can issue QSBS at investment, particularly in the $50M–$75M gross assets range. For fund investing under §1202(g), the look-through rules still apply — LP investors must still satisfy their own holding period and the LP's share of the gain must trace back to eligible QSBS at the portfolio level.

The tiered exclusion also creates planning optionality for early secondary sales: a 3-year hold with 50% exclusion may be preferable to an uncapped gain if the secondary market is active and the company's trajectory has turned uncertain.

Coordinating OBBBA planning before a transaction

QSBS planning is most valuable in the period before a transaction closes. Once a sale is signed or a tender offer is accepted, the options narrow significantly. The questions to resolve in advance include:

• Does the stock qualify under the applicable regime (pre- or post-OBBBA)?
• What is the exact holding period, and what exclusion tier does it reach?
• Is the effective tax rate on unexcluded gain (28% + state) worse than waiting for the next tier?
• What is the plan for gain above the exclusion cap?
• Does gifting before the sale create additional exclusion capacity for family members or trusts?
• What are the state tax consequences in your state of residence on the sale date?

A fee-only financial advisor who specializes in founder liquidity and QSBS planning can run the multi-scenario model — pre-OBBBA vs. post-OBBBA, 3- vs. 4- vs. 5-year exit timing, with and without gifting — before the transaction closes.

Get matched with a QSBS-specialist advisor

If you hold stock that may qualify under pre- or post-OBBBA rules and a transaction is approaching, tell us where you are in the process — we will match you with a fee-only advisor who specializes in founder liquidity and Section 1202 planning.

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Related guides

• QSBS Holding Period: When the 5-Year Clock Starts
• Does My Stock Qualify? The 8 Section 1202 Tests
• QSBS Exclusion Calculator (pre- and post-OBBBA)
• QSBS Gifting and Stacking to Multiply the Cap
• State Conformity: Which States Tax QSBS Gain
• QSBS and AMT: When You Owe Alternative Minimum Tax
• Section 1045 Rollover: Defer Gain on Pre-5-Year Sales
• Post-Exit Investing After a QSBS Liquidity Event

Sources

All tax values and statutory references are verified as of June 2026.

1. Baker Tilly — Changes to Section 1202 QSBS in the One Big Beautiful Bill Act (July 2025) — tiered holding percentages, $15M cap, $75M gross assets threshold, inflation indexing
2. K&L Gates — Amendments to Section 1202 Tax Exclusion Under OBBBA (August 2025) — pre/post-OBBBA comparison, effective date, angel investor implications
3. McLane Middleton — OBBBA Changes to the QSBS Regime: A Comprehensive Overview — 28% rate on unexcluded gain at 3- and 4-year holds, §1(h)(7) mechanics
4. Perkins Coie — Significant Changes by OBBBA to the QSBS Provisions of Section 1202 — AMT treatment, complete provision analysis
5. The Tax Adviser (AICPA) — QSBS Gets a Makeover: What Tax Pros Need to Know About Sec. 1202's New Look (November 2025)
6. RSM US — The OBBBA Expands QSBS Exclusions: What It Means for Businesses and Investors