Capital gains tax is a particularly painful one. It directly eats into your profit, taking a significant chunk. That’s especially troubling to founders and investors who want to liquidate some of their shares. With capital gains in play, the amount of money you thought you’d earn from your investment gets smaller.
Lawmakers realized this and did something about it. To incentivize investment in American small businesses, they created §1202 of the Internal Revenue Code (IRC): Partial Exclusion for Gain from Certain Small Business Stock.
Called qualified small business stock (QSBS), stock eligible for this tax treatment can get excluded from capital gains. And now, thanks to the One Big Beautiful Bill Act — or, more simply and more accurately, the Act — QSBS provisions getting expanded.
Let’s look at how.
The three main changes from §70431
- 70431 of the Act is specifically titled, “Expansion of Qualified Small Business Stock Gain Exclusion.” It adjusts QSBS eligibility and how the sale of qualifying stock gets taxed in three significant ways.
#1: Shorter holding period options
Under old QSBS rules, you needed to hold the shares for at least five years to qualify for the capital gains tax exemption. That’s still true for 100% exemption (up to the cap, more on that below).
But now, if you need or want to sell earlier, you may still see some tax benefits. Specifically, §70431 creates a tiered system, applying percentages of shares that sellers can get exempted from capital gains based on how long they’ve held the stock.
Now, QSBS rules apply as follows:
| Years held | Percentage exempt from capital gains |
| 3 | 50% |
| 4 | 75% |
| 5 | 100% |
This new timetable only applies to stock acquired after the Act’s effective date of July 4, 2025. All stock acquired before that is still subject to the five-year holding requirement.
#2: Higher lifetime dollar-based caps for individual sellers
Historically, people have been able to apply this capital gains exemption to up to $10 million in proceeds.
This lifetime limitation works on a per-issuer basis. That means that if an investor sells $10 million in stock from one company, they can still use this benefit for up to $10 million in stock sold from another company (i.e., another issuer).
The Act increases this lifetime per-issuer cap by 50%, taking it from $10 million to $15 million. And that’s just for 2025 and 2026. After that point, that dollar amount gets a cost-of-living adjustment, meaning it will most likely increase over time.
#3: Higher qualifying ceiling for small businesses
The Act’s adjustments to QSBS rules also make it easier for more businesses to get their shares to qualify for this special tax treatment. An aggregate gross asset value cap is still in place. It was $50 million before, but the Act now sets it at $75 million. That ceiling will also get adjusted for inflation from 2027 on.
This immediately opens up new opportunities for corporations under the $75 million cap. If your company had previously issued QSBS but had hit the $50 million ceiling and had to stop, for example, you can start back up again.
Work with your accountant here because there may be some clever ways to stay under that threshold. The Act’s other tax provisions — like the ability to expense qualifying domestic R&D costs — might help you bring your aggregate gross assets down.
A note about the effective date
Throughout §70431, you’ll see language about the effective date. This dictates when these new provisions come into play. Specifically, the Act says:
- Shorter holding periods: “Except as provided in subparagraph (B), the amendments made by this subsection shall apply to taxable years beginning after the date of the enactment of this Act.”
- Higher lifetime caps: “The amendments made by this subsection shall apply to taxable years beginning after the date of the enactment of this Act.”
- Higher qualifying ceiling for businesses: “The amendments made by this subsection shall apply to stock issued after the date of the enactment of this Act.”
The Act was enacted on July 4, 2025. That means that corporations can start issuing QSBS immediately provided they’re under the $75 million cap. For shareholders, the shorter holding period and $15 million cap come into play for any shares sold in their next taxable year.
As you’re thinking about dates, you might wonder if there are some creative workarounds here. Could you, for example, exchange stock you held before the Act went into effect for new stock issued after that date, qualifying you for the shorter holding period? Probably not. The Act specifically includes an acquisition date clause that speaks to IRC §1223, which makes this tricky. That’s the mention of subparagraph (B) in the shorter holding period effective date language.
Generally, then, all of these new provisions apply from July 4, 2025 on, and some don’t go into effect until your first taxable year after that date. Your accountant can help you figure out which timelines apply to your specific situation.
Qualifying for QSBS
While the Act makes some notable adjustments to IRC §1202, a lot of rules around QSBS remain unchanged.
Your business still can’t be in one of the excluded categories. That disqualifies many service-based businesses (e.g., financial services, engineering) and companies operating in banking, farming, and other categories.
Additionally, you still need to meet the active business requirement. This stipulates that your company needs to be using at least 80% of its assets in actively conducting your business. You generally can’t be sitting on a lot of investments, then.
All of the preexisting and new QSBS rules add quite a bit of complexity. There’s a lot to consider from the company side, including the aggregate gross assets ceiling and the active business requirement. Then, there’s a lot to manage on your individual taxpayer side if you plan to liquidate some of your stock.
We can help with all of this. From figuring out what your business needs to do to issue qualified small business stock to understanding the most tax-advantaged way to sell shares, we’re here. To speak with a knowledgeable CPA about what QSBS can mean for your company or for you personally, get in touch with our team.
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