Want to sell your C-Corp stock and pay zero? Maybe faster than you thought. For years, the QSBS (Qualified Small Business Stock) exclusion under Section 1202 has been one of the most powerful wealth-creation tools in the U.S. tax code, allowing investors and founders to potentially exclude 100% of their capital gains tax. Now, thanks to the "One Big Beautiful Bill Act" (OBBBA) signed into law on July 4, 2025, this powerful incentive just got a massive makeover. The QSBS rules have been expanded, creating new flexibility and higher return potential for savvy taxpayers.
What is QSBS? A 60-Second Refresher
Before we dive into the new rules, let's review the basics. QSBS is a special class of stock from a "Qualified Small Business," which is a domestic C-corporation.
In simple terms, Section 1202 allows a non-corporate taxpayer (like you, an investor, or a founder) to sell their QSBS and pay zero federal capital gains tax on the profits.
Under the "old" rules (which still apply to all QSBS acquired on or before July 4, 2025), you had to meet two main hurdles to get the 100% exclusion:
- Hold the stock for more than five years.
- The gain excluded was capped at the greater of $10 million or 10 times your adjusted basis in the stock.
This was, and still is, an incredible deal. But the new OBBBA law just made QSBS even better.
The OBBBA Makeover: 3 Key Upgrades to the QSBS Rules
The new law doesn't replace the old QSBS rules; it adds new, more favorable ones for stock acquired after July 4, 2025. If you own QSBS from before that date, your stock is still governed by the $10 million cap and 5-year-only rule.
But for all new QSBS investments, here are the three biggest changes.
1. The Tiered Holding Period (Get Benefits Faster)
The old 5-year "cliff" was unforgiving. If you sold at 4 years and 11 months, you got 0% exclusion.
The new QSBS rules introduce a tiered system, giving you flexibility. Think of it like a loyalty program: the longer you hold, the more you save.
- Hold < 3 years: 0% exclusion.
- Hold ≥ 3 years: 50% gain exclusion.
- Hold ≥ 4 years: 75% gain exclusion.
- Hold ≥ 5 years: 100% gain exclusion.
This is a massive change. It "de-risks" the holding period. Now, an unexpected early exit or acquisition at year 3.5 doesn't mean you lose all QSBS benefits. You still get to exclude half your gain, which is a fantastic outcome.
2. The Per-Issuer Cap Jumps to $15 Million
The $10 million exclusion cap was generous, but for hyper-successful startups, it was a limiting factor. The new QSBS rules raise that cap.
For QSBS acquired after July 4, 2025, the exclusion is capped at the greater of:
- $15 million (up from $10 million)
- 10 times your adjusted basis (this part remains unchanged)
That's a 50% increase in the baseline exclusion. This $15 million cap will also be indexed for inflation starting in 2027, so it will continue to grow over time.
3. The Company Asset Limit Expands to $75 Million
This is a huge win for startups. To issue QSBS, a company must have aggregate gross assets of $50 million or less at all times before and immediately after the stock is issued.
This $50 million cap often forced growing companies to make tough choices about fundraising, sometimes disqualifying them from issuing new QSBS just as they were scaling.
The new QSBS rules raise this corporate asset threshold to $75 million. This allows more mature, later-stage startups to remain "qualified," letting them raise more capital and allowing more investors and employees to get in on this powerful tax benefit.
Old vs. New QSBS Rules: A Simple Comparison
Here is a simple breakdown of the changes for stock acquired AFTER July 4, 2025.
| Feature | Old QSBS Rules (Stock acquired ≤ July 4, 2025) | New QSBS Rules (Stock acquired > July 4, 2025) |
|---|---|---|
| Holding Period | 5-year "cliff" for 100% exclusion. 0% before. | Tiered: 50% (3+ yrs), 75% (4+ yrs), 100% (5+ yrs) |
| Gain Exclusion Cap | Greater of $10 million or 10x basis. | Greater of $15 million or 10x basis. |
| Corporate Asset Cap | Company gross assets must be ≤ $50 million. | Company gross assets can be ≤ $75 million. |
| Inflation Adjustment | None. | Caps indexed for inflation starting in 2027. |
The 5 Core QSBS Rules That Haven't Changed
The new law is exciting, but it doesn't make QSBS automatic. The new rules are built on top of the old foundation, and the original "traps" are all still there. Failing any one of these can disqualify your entire exclusion.
1. C-Corporation Only
The company must be a domestic C-Corp. S-Corps and LLCs do not qualify (unless the LLC elects to be taxed as a C-Corp).
2. Original Issuance
You must acquire the stock directly from the company at its Original Issuance. Buying it from another investor on the secondary market (even 1 day later) disqualifies it.
3. Active Business
The company must use at least 80% of its assets in an active business. Passive investment companies don't count.
4. Qualified Business
The company cannot be in an excluded field. This includes:
- Health, Law, Engineering, Architecture, Accounting
- Consulting, Financial Services, Brokerage Services
- Hotels, Restaurants, and many others.
5. Non-Corporate Shareholder
You, the shareholder, must not be a C-Corporation. Individuals, trusts, and pass-throughs (like S-Corps or LLCs/Partnerships) can hold QSBS.
What About Section 1045? The "Faster" Rollover
The user's hook mentioned getting to "zero tax... faster than you thought." The new 3-year tiered rule is one way. The other, more advanced strategy is the Section 1045 Rollover.
Section 1045 lets you sell QSBS before your holding period is met (even at 1 year) and defer all the gain, if you reinvest the proceeds into new QSBS within 60 days.
Here's the magic: The holding period of your original stock "tacks on" to the new stock.
Analogy: The 1045 "Relay Race"
Think of your 5-year holding period as a relay race.
- You hold Stock A for 2 years (your first leg).
- You sell it and, within 60 days, buy Stock B (the new QSBS).
- You "pass the baton." The 2-year holding period from Stock A is tacked onto Stock B.
- Now, you only need to hold Stock B for 3 more years (not 5) to qualify for the 100% QSBS exclusion.
This strategy is complex and requires perfect timing, but it's a powerful way to "roll" your gains and stack your holding periods.
One OBBBA Limit: The new law clarifies that you can't use a 1045 rollover to "upgrade" your cap. If you sell pre-OBBBA stock ($10M cap) and roll it into post-OBBBA stock, your "tacked" stock is still subject to the old $10M cap.
The Million-Dollar Mistake: Why You Need to Document Your QSBS Claim
These new rules are a green light for founders and investors. But with a $15 million tax-free windfall on the line, you can be certain the IRS will be scrutinizing these claims.
A QSBS claim is not something you "figure out" when you file your taxes. It must be planned for and documented from day one. You must prove:
- The company was a C-Corp.
- It was under the asset cap ($50M or $75M) on the day you received your shares.
- It met the 80% "active business" test for your entire holding period.
- It was not in a "disqualified" industry.
Failing a audit is not a small mistake. It's a catastrophic one. The difference between a 0% tax rate and the top capital gains rate (plus state tax) can be a 7-figure or 8-figure tax bill, plus penalties and interest. If you are already facing an IRS audit, get professional help immediately.
Take Action Before You Have a Problem
The best defense is a good offense. If you are a founder or investor hoping to use the new rules, you must maintain meticulous records.
But if you are facing an exit, or worse, are already facing an IRS audit on a claim that went wrong, you are suddenly in a high-stakes financial battle. This is not a problem for a regular accountant; it's a "High Dollar Unit" case that requires specialized tax resolution professionals.
This is precisely the type of complex, high-stakes tax problem that firms like IRSProb.com are built to handle. They specialize in representing taxpayers in complex IRS disputes, including audit defense, levy removal, and managing high-dollar tax debts. The new rules create massive opportunities, but they also create massive risks. Don't navigate them alone.
Get Professional Help NowDisclaimer: This article is for informational purposes only and does not constitute tax or legal advice. The tax code is complex. Consult with a qualified CPA, tax attorney, and financial advisor to discuss your specific situation and how the new QSBS rules under Section 1202 may apply to you.
