United States / Guides / QSBS after OBBBA: the new section 1202 in plain words
United States · guideQSBS after OBBBA: the new section 1202 in plain words
The short answer
Qualified small business stock (QSBS) under Internal Revenue Code section 1202 lets an eligible non-corporate holder exclude some or all of the gain on a sale of qualifying C-corporation stock from federal income tax. For stock issued after July 4, 2025, the One Big Beautiful Bill Act (OBBBA) replaced the old all-or-nothing five-year holding requirement with a tiered schedule — 50% exclusion at a three-year hold, 75% at four years, 100% at five years — and raised the per-issuer exclusion cap from $10 million to $15 million and the corporation-eligibility gross-asset ceiling from $50 million to $75 million. Stock issued on or before July 4, 2025 keeps running under the pre-OBBBA rules: the five-year cliff, the $10 million cap, and the $50 million ceiling. None of this is self-executing — whether a specific holding actually qualifies is a determination the taxpayer makes with their CPA or tax counsel against the corporation's own records, not a default status every startup share carries.
Key facts — verified dates on each
What section 1202 excludes, and what it does not
Section 1202 is a gain-exclusion provision, not a tax credit or a deduction. It applies to a non-corporate taxpayer's sale of stock in a domestic C corporation, and only when a list of conditions is met at both the corporate level (an active qualified trade or business, aggregate gross assets under the statutory ceiling at and shortly after issuance, not a disqualified business type such as most personal-service, banking, farming, hotel, or restaurant businesses) and the shareholder level (the stock was acquired at original issue, generally in exchange for cash, property, or services, and held for the required period).
When the conditions are met, a percentage of the gain on sale is excluded from federal income tax, subject to a cap. The exclusion is elective in effect only in the sense that it depends on facts established years earlier — a corporation either was a qualified small business at issuance or it was not, and that status does not change retroactively because a later round of financing pushed the company's balance sheet past the ceiling.
The exclusion is a federal income tax provision; state tax treatment of QSBS gain varies and is a separate question entirely, one a holder's own tax adviser needs to work through state by state.
The new tiered holding period for stock issued after July 4, 2025
Before OBBBA, section 1202 worked on a cliff: hold the stock five years and exclude a large share of the gain (up to 100% for stock issued after September 27, 2010), or sell earlier and get no section 1202 exclusion at all for that sale. OBBBA replaced that cliff, for stock issued after July 4, 2025, with a tiered schedule tied to how long the stock was actually held before sale.
Under the new schedule, a sale after at least three years but less than four years of holding excludes 50% of the eligible gain; a sale after at least four years but less than five excludes 75%; a sale after five years or more excludes the full amount, subject to the cap discussed below. A sale before the three-year mark gets no section 1202 exclusion, the same as under the old rule.
The practical effect is that an earlier exit is no longer an all-or-nothing decision against the exclusion — a three- or four-year hold now carries a partial benefit that did not exist before. But the tiered schedule only applies to stock issued after the July 4, 2025 cutoff; it does not retroactively soften the five-year requirement for stock a holder already owns from an earlier issuance.
The two ceilings: the $15 million per-issuer cap and the $75 million gross-asset test
Two separate dollar limits govern QSBS, and they answer different questions. The per-issuer exclusion cap limits how much gain any one holder can exclude from stock in any one corporation — for stock issued after July 4, 2025, OBBBA raised that cap from $10 million to $15 million (or, if greater, ten times the holder's adjusted basis in the stock), with the $15 million figure indexed for inflation starting in tax years beginning after 2026.
The gross-asset test is an eligibility gate at the corporate level: the corporation's aggregate gross assets, valued at original cost, generally cannot exceed the statutory ceiling at any time before and immediately after the stock is issued. OBBBA raised that ceiling from $50 million to $75 million for stock issued after July 4, 2025, with the same post-2026 inflation indexing applied to the higher figure.
Both figures matter because they cut in opposite directions for planning purposes: the gross-asset test is checked once, at and around issuance, and fixes whether the stock could ever qualify; the per-issuer cap is checked at the time of sale, against gain actually realized, and can matter across multiple sales or multiple issuers if a founder or early investor holds stock in more than one qualifying company.
Old stock, new stock: why the issue date is the whole ballgame
None of the OBBBA changes apply to stock issued on or before July 4, 2025. That stock continues to run under the pre-OBBBA rules in full: a five-year holding requirement with no partial credit for an earlier sale, a $10 million per-issuer cap, and a $50 million gross-asset ceiling for the issuing corporation. A single investor can hold both vintages — pre-OBBBA shares from an earlier round and post-OBBBA shares from a later one in the same company — and each block is tested separately against its own rule set.
This makes the stock's issue date, not the date of purchase by a secondary buyer or the date the company was founded, the fact that determines which regime governs a given block. A convertible note or SAFE that converts to stock after July 4, 2025 generally takes the issue date of the conversion, not the date the note was signed — a distinction that matters for anyone tracking whether their holding falls under the old or new rules.
Because the two regimes produce materially different outcomes on the same facts (a four-year hold is worthless under the old rule and worth a 75% exclusion under the new one), a holder's adviser needs the exact issuance date of each block of stock, not an approximate one, before advising on exit timing.
Why clean books and a defensible cap table matter to the eventual claim
A QSBS exclusion is claimed on a tax return years after the stock was issued, but the facts that support it are set at issuance and tested continuously afterward: the corporation's gross assets at the relevant dates, whether the business stayed within a qualifying trade or business, and the exact date and terms of each issuance. A company that cannot reconstruct its balance sheet as of a financing round two years back, or whose cap table shows inconsistent issuance dates across systems, hands its shareholders a harder — and sometimes unwinnable — case to make when a sale eventually happens.
This is bookkeeping and financial-reporting work, not tax return preparation: closed monthly books that tie asset totals to what was reported at each financing event, and a cap table that reconciles to the stock ledger and board consents authorizing each issuance. A company that keeps that trail current gives its shareholders and their tax preparers a documented record to work from, rather than a reconstruction project undertaken under time pressure when a sale is already in progress.
CapEasy's bookkeeping and financial-reporting support keeps that underlying record — the general ledger, gross-asset history, and cap table reconciliation — current and audit-ready; determining whether a specific holding actually qualifies for the section 1202 exclusion, and preparing the return position that claims it, is done by the shareholder's own CPA or tax counsel.
The figures, and when we checked them
These numbers change by year or by notification. Each one shows the date we last verified it against the source — if that date looks old, check the source before relying on it.
Questions on this
What is QSBS?
Qualified small business stock is stock in a domestic C corporation that meets a set of requirements under Internal Revenue Code section 1202, allowing an eligible non-corporate holder to exclude some or all of the gain on its sale from federal income tax. It is a gain-exclusion provision, not a credit, deduction, or automatic status every startup share carries.
What changed under OBBBA?
For stock issued after July 4, 2025, OBBBA replaced the five-year all-or-nothing holding requirement with a tiered schedule (50% at 3 years, 75% at 4 years, 100% at 5 years), raised the per-issuer exclusion cap from $10 million to $15 million, and raised the corporate gross-asset eligibility ceiling from $50 million to $75 million. Stock issued on or before that date keeps the prior rules.
Does the tiered holding period apply to stock I already hold?
Only if that stock was issued after July 4, 2025. Stock issued on or before that date remains subject to the original five-year cliff with no partial exclusion for an earlier sale, regardless of when OBBBA itself was enacted.
Is the $15 million cap per company or across all my QSBS holdings?
It applies per issuer — a holder with qualifying stock in more than one corporation tracks the cap separately for each one, not against a combined lifetime total across every company.
What is the gross-asset test and when is it checked?
It is a corporate-level eligibility requirement: the issuing corporation's aggregate gross assets, valued at original cost, generally cannot exceed the statutory ceiling at any time before the stock is issued and immediately afterward. It is tested at and around issuance, not continuously through the company's later growth — a company that grows past the ceiling after a qualifying issuance does not retroactively disqualify that earlier stock.
Does every startup automatically qualify as a "qualified small business"?
No. Beyond the gross-asset ceiling, the corporation must be conducting an active qualified trade or business and must not fall into a list of excluded business types under section 1202(e), among other requirements. Whether a specific company and a specific issuance met every requirement at the relevant time is a determination made against the company's own records, typically by the shareholder's tax adviser.
Does a SAFE or convertible note count from the date it was signed?
Generally, stock issued on conversion of a SAFE or convertible note takes the issue date of the actual stock issuance on conversion, not the date the earlier instrument was signed. That distinction can determine whether a block of stock falls under the pre-OBBBA or post-OBBBA rules, and it is a fact worth confirming with the company's cap table and legal documentation rather than assuming.
How does record-keeping affect a QSBS claim years later?
A QSBS exclusion depends on facts fixed at issuance — gross assets at the relevant dates, the nature of the business, exact issuance terms and dates — that a shareholder's tax preparer needs to document at the time of a sale, often years after the facts occurred. Closed monthly books and a reconciled cap table give that preparer a documented trail to work from instead of a reconstruction under time pressure.
Does CapEasy determine whether my stock qualifies for section 1202?
No. CapEasy's bookkeeping and financial-reporting support keeps the underlying general ledger, gross-asset history, and cap table reconciliation current so the record exists when it is needed. Determining QSBS eligibility and claiming the exclusion on a return is done by the shareholder's own CPA or tax counsel.
Is this investment advice about whether to hold or sell QSBS?
No. This is general information about how the section 1202 exclusion is structured after OBBBA, not a recommendation about any individual's holding, timing, or investment decision. Holding-period and exit-timing decisions involve tax, investment, and personal factors that belong with a holder's own CPA, tax counsel, and financial adviser.
Primary sources
- 26 U.S.C. 1202 — Partial exclusion for gain from certain small business stock (Legal Information Institute, Cornell Law School)
- H.R. 1, One Big Beautiful Bill Act, 119th Congress — enrolled text (Congress.gov, Library of Congress)
- IRS Instructions for Schedule D (Form 1040) — capital gains and losses, including QSBS reporting
Last reviewed 2026-08-14. Statutes and schedules change — the sources above are authoritative, this page is orientation.
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