When OBBBA (the "One Big Beautiful Bill Act") was enacted on July 4, 2025, it was more than just a typical tax package. It fundamentally changed the rules for Qualified Small Business Stock (QSBS) under Section 1202, serving as a significant wealth-transfer and exit-planning tool for founders and investors.
In this article, we'll walk you through the origin story of QSBS to the turbocharged new regime. Our goal: by the time you reach the end, you'll not only understand exactly what's changed, but know how to adjust your strategy, from equity structuring to exit timing.
QSBS wasn't born overnight; it evolved over decades, steadily becoming one of the richest tax tools for entrepreneurs and early employees.
By mid-2025, QSBS had become factored into term sheets, exit modeling, entity structure decisions, and generational wealth planning. Yet many of the rules remained brittle; one misstep could render the benefit entirely disqualifiable.
→ For the IRS's official guidance on Qualified Small Business Stock under Section 1202, see IRS Topic No. 409 – Qualified Small Business Stock.
Enter OBBBA: the 2025 rewrite that doesn't discard QSBS; it enhances it.
Before July 4, 2025, the "classic" QSBS regime applied to stock issued on or before that date (and to holdings that satisfied all conditions). Here's how it worked:
| Key elements of pre-OBBBA QSBS: |
|---|
| Original issuance requirement: You must acquire the stock directly from the corporation (in exchange for cash, property, or services). Secondary market purchases generally don't qualify. |
| Aggregate gross asset ceiling: The issuing C corporation (and its predecessors) must never have held more than $50 million in aggregate gross assets immediately before or after the issuance. |
| Active business test: During substantially all of your holding period, at least 80% of the corporation's assets must be devoted to active business (not passive investment, leasing, specific services, etc.). |
| Holding period rule: You must hold the QSBS for more than five years to qualify for maximum exclusion. |
| Exclusion cap: The excluded gain per issuer is limited to the greater of: • $10 million (or $5 million for married filing separately), minus any prior QSBS exclusions from that issuer, or • 10× your adjusted basis in the QSBS sold. |
| Tax treatment of non-excluded gain: Any gain beyond your exclusion is taxed at 28% (so-called "section 1202 gain"), plus applicable NIIT (3.8% where relevant). The excluded portion is not treated as an AMT preference item under classic QSBS rules. |
| There were transitional exclusion rates too: QSBS acquired between August 1993 and February 2009 had a 50% exclusion; between February 2009 and September 2010 had 75%; from September 2010 onward (up to OBBBA) qualified for full 100% exclusion (assuming the 5-year hold). |
The brilliance (and fragility) of QSBS lies in its "all-or-nothing" nature: mis-timing your exit by days or a restructuring misstep could result in millions of dollars in taxes.
OBBBA's QSBS amendments are sweeping yet surgical. The law preserves the core concept of rewarding long-term startup investment, while softening its rigid edges and expanding its capacity.
Here's a side-by-side:
| Feature | Pre-OBBBA | Post-OBBBA (for QSBS issued after July 4, 2025) |
|---|---|---|
| Exclusion timing/tiers | Must hold >5 years to get up to 100% | Tiered exclusion: ≥ 3 years → 50%; ≥ 4 years → 75%; ≥ 5 years → 100% |
| Per-issuer exclusion cap | Greater of $10M or 10× basis | Greater of $15M (indexed starting 2027) or 10× basis |
| Gross asset threshold | $50M | $75M (indexed later) |
| Original issuance & active business tests | Required as before | Same rules remain intact (no broad redefinition) |
| AMT treatment | Exclusion was not an AMT preference item for 100% exclusion | The new partial exclusion (50% or 75%) is explicitly not treated as an AMT preference item |
| Carryover/ reorganization constraint | N/A (the old regime is static) | You generally cannot "convert" pre-OBBBA QSBS into new post-OBBBA status via reorganizations or exchanges; the acquisition date carries over (IRC §1223 rules) |
Because of those carryover rules, your pre-OBBBA holdings stay under the "old regime rules." You can't just reorganize or swap them into the new, more favorable regime without facing complexity or disqualification.
One more thing: the law provides that excluded gains from the 3-year or 4-year partial regimes are not treated as AMT preference items, reducing a key drag for high-income taxpayers.
Transformations of this magnitude always come with tension. Below are the primary technical traps that deserve your immediate attention (and counsel):
One of the most material ambiguities is whether you:
Depending on your valuation and basis, the difference can amount to millions in extra tax. Many commentators favor applying the percentage first (i.e., excluding 50% of the full gain subject to the cap), but no definitive regulation currently dictates this ordering. Proceed cautiously.
Your federal gain exclusion doesn't automatically translate to your state returns. Some states do not conform to QSBS or may impose limitations on it. Especially if you're in a high-tax state, you must run a state-level overlay analysis.
Because acquisition date and carryover rules are critically tested under OBBBA, a careless merger, spin-off, or recap can taint your QSBS eligibility or force your stock into the pre-OBBBA regime. Always build safe harbor structuring and clean waterfall language upfront.
Given the novelty of the regime, expect the IRS and Treasury to scrutinize basis allocations, issuance events, qualification dates, corporate asset tests, and compliance with restructuring. Keep meticulous contemporaneous records.
Even if most gains are excluded, any remainder is taxed at 28% plus a possible 3.8% NIIT. In large exits, that residual can still be a substantial burden, and it must be baked into exit modeling.
Here's a tactical "cheat sheet" of immediate actions you should be discussing with your tax and financial advisors:
Segment your QSBS buckets.
Label all your QSBS holdings as "pre-OBBBA" vs. "post-OBBBA." Treat them separately in exit modeling. Use up the pre-OBBBA exclusion room first before dipping into the new regime.
Run exit simulations at 3, 4, and 5 years.
Build a decision tree:
Weigh additional growth upside versus tax savings from deferring.
Design equity issuances with QSBS in mind.
From day one, monitor your capital structure so that your "aggregate gross assets" stay clear of $75M at issuance. Use depreciation, R&D expensing, or balance sheet planning to manage book values.
Protect acquisition date & avoid contamination.
In M&A, rollovers, or restructurings, be sure your agreements preserve carryover rules and don't inadvertently "reset" acquisition dates in ways that trigger disqualification.
Stack exclusion room via gifting & trusts
The $15M cap is per taxpayer. Thoughtful gift transfers to other taxpayers (children, trusts, etc.) can multiply your exclusion potential — provided the recipient can satisfy holding period requirements.
Check your state rules.
Before depending on federal exclusion, confirm whether your state will recognize QSBS gains, whether it follows inflation indexing, or whether it imposes its own limitations.
Stay plugged into updates.
Treasury and IRS commentary, proposed regulations, and audit guidances are expected. Be nimble — the interpretive safe harbors may evolve.
OBBBA's overhaul of Section 1202 doesn't abandon QSBS; it reengineers it for modern venture scale. By softening the 5-year "cliff," raising caps, and expanding the size of issuers, Congress has made QSBS more usable and potent than ever.
Yet the power lies in the details. The practical winners will be those who:
→ For broader capital-gain reporting standards and definitions, refer to IRS Publication 550.
At VIP Wealth Advisors, we help founders, early employees, and investors model exits under the new OBBBA rules and design structures that protect Section 1202 benefits.