The Section 1202 tax exclusion for Qualified Small Business Stock (QSBS) has evolved dramatically from its original 1993 introduction to today’s One Big Beautiful Bill Act expansion. If you’re a venture-backed founder researching your exit strategy, understanding the exact exclusion percentages and eligibility timeline could save you millions in federal taxes.
This definitive QSBS exclusion chart breaks down every tier, effective date, and exclusion cap so you can optimize your tax strategy regardless of when you acquired your stock.
The Complete QSBS Exclusion Timeline
Your potential tax savings depend entirely on when you acquired your stock. A difference of just one day can mean the distinction between paying zero taxes and owing millions to the IRS.
Pre-OBBBA Rules (Stock Issued Before July 5, 2025)
| Acquisition Period | Exclusion % | Holding Period Required | Effective Tax Rate | Per-Person Cap |
|---|---|---|---|---|
| August 11, 1993 – February 17, 2009 | 50% | 5 years | ~17.8% | $10M or 10x basis |
| February 18, 2009 – September 27, 2010 | 75% | 5 years | ~8.9% | $10M or 10x basis |
| September 28, 2010 – July 4, 2025 | 100% | 5 years | 0% | $10M or 10x basis |
Post-OBBBA Rules (Only Applies to Stock Issued After July 4, 2025)
| Holding Period | Exclusion % | Effective Tax Rate | Per-Person Cap |
|---|---|---|---|
| 3+ years (but <4) | 50% | ~15.9% | $15M or 10x basis |
| 4+ years (but <5) | 75% | ~7.95% | $15M or 10x basis |
| 5+ years | 100% | 0% | $15M or 10x basis |
Note: Effective tax rates reflect a 28% capital gains rate and 3.8% Net Investment Income Tax (NIIT) on the taxable (non-excluded) portion of QSBS gains. For Pre-OBBBA QSBS, calculations also include a 7% Alternative Minimum Tax (AMT) preference adjustment.
How the One Big Beautiful Bill Act Changes Everything
The OBBBA, signed into law on July 4, 2025, represents the most significant expansion of QSBS benefits since the provision was created.
Here’s what changed for venture-backed founders:
1. Shortened Holding Period Benefits
Previously, you needed to wait five full years to see any QSBS tax benefit. The new law creates a tiered system starting at just three years:
- Three-Year Scenario: A founder with $20 million in QSBS gains (held 3+ years) would exclude $10 million and pay taxes on $10 million at 31.8% (28% + 3.8% NIIT) = $3.18 million in federal taxes instead of $6.36 million without QSBS.
- Four-Year Scenario: The same founder holding for 4+ years would exclude $15 million, paying taxes on only $5 million = $1.59 million in federal taxes.
- Five-Year Scenario: Full exclusion means zero federal tax on the entire $20 million gain.
2. Increased Exclusion Caps
The per-issuer gain cap jumped from $10 million to $15 million for stock issued after July 4, 2025. This 50% increase acknowledges inflation since the original 1993 cap and will be indexed for inflation beginning in 2027.
3. Higher Asset Threshold for Qualifying Companies
Companies can now have up to $75 million in aggregate gross assets (up from $50 million) at the time of stock issuance and still qualify for QSBS treatment. This expanded threshold means later-stage startups and scale-ups can continue issuing QSBS-eligible equity longer into their growth trajectory.
Critical Planning Considerations for Founders
Understanding the exclusion percentages is just the beginning; the real complexity lies in how these rules interact with your specific stock acquisition timeline, and getting the details wrong can cost you millions in unnecessary taxes.
Acquisition Date Matters More Than Sale Date
Your QSBS exclusion percentage is locked in based on when you acquired the stock, not when you sell it. A founder who received stock in 2015 gets 100% exclusion (after 5 years) even if they sell in 2030, while stock issued in 2026 follows the new tiered system.
Mixed Stock Positions Require Meticulous Records
Many founders will have multiple tranches of stock with different acquisition dates and exclusion rules. Consider this scenario:
Founder Sarah’s Stock Portfolio:
- 1 million shares acquired December 2020 (100% exclusion after 5 years)
- 500,000 shares acquired August 2025 (tiered exclusion system)
- 200,000 shares from option exercises in 2026 (tiered exclusion system)
Each tranche follows its own rules, making precise record-keeping essential for optimal tax planning.
The $75 Million Asset Test Creates New Opportunities
Previously, a company raising a large Series B might have exceeded the $50 million asset threshold, disqualifying future stock issuances from QSBS treatment. The increase to $75 million provides more runway for equity compensation and additional fundraising while maintaining QSBS eligibility.
State Tax Considerations
While this chart focuses on federal exclusions, remember that state treatment varies significantly:
- California: Does not conform to federal QSBS exclusion
- New York: Conforms, and follows the federal treatment
- Florida/Texas/Nevada: No state income tax makes federal exclusion even more valuable
Strategic Planning Before Your Exit
The difference between maximizing and missing your QSBS benefits often comes down to proactive planning decisions you make today, not scrambling to understand the rules after you’ve already signed a term sheet.
For Pre-Exit Founders (0-3 Years Out)
If you’re still 12-36 months from a liquidity event, consider:
- Stock Documentation Review: Ensure all acquisition dates are properly documented, and whether shares meet the original issuance requirement
- Additional Equity Opportunities: Consider whether exercising options or receiving additional equity grants makes sense under the new OBBBA rules
- State Domicile Planning: Evaluate whether relocating to a favorable state jurisdiction aligns with your timeline
For Active Exit Situations
If you have an LOI on the table:
- Mixed Tranche Analysis: Calculate the optimal tax treatment for each issuer/stock position
- Timing Flexibility: Understand whether delaying the exit by 3-12 months could trigger a more favorable exclusion tier
- Rollover Opportunities: Consider Section 1045 rollovers for non-excluded gains
Beyond the Exclusion: Advanced QSBS Strategies
Sophisticated founders aren’t just focused on the basic exclusion percentages.
Advanced strategies include:
| Strategy | Description | Purpose/Benefit |
|---|---|---|
| QSBS Stack Acceleration | Using family members, trusts, and other entities to multiply the per-person exclusion caps beyond the $10-15 million individual limits. | Increases total QSBS exclusion by leveraging multiple qualified holders. |
| Section 1045 Reinvestment | Rolling non-excluded portions of QSBS gains into new qualified investments to defer taxation while potentially accessing higher future exclusions. | Defers taxes and allows for possible future tax-free gains by reinvesting in other qualifying stock. |
| Estate Planning Integration | Incorporating QSBS planning with generation-skipping trust strategies for multi-generational wealth transfer. | Enables tax-efficient transfer of wealth across generations, maximizing long-term benefits. |
Your Next Steps
The QSBS exclusion landscape has never been more complex, or more opportunity-rich. With the OBBBA’s expansion creating multiple exclusion tiers and higher caps, the potential federal tax savings for venture-backed founders can easily reach into eight figures.
But, navigating this complexity requires expertise in both the technical tax rules and the practical realities of startup exits. Getting the planning wrong doesn’t just cost money; it can cost millions in unnecessary taxes. If you’re a venture-backed founder with a potential exit on the horizon, the time for QSBS planning is now, not after you’ve signed the definitive agreement.
Want to explore how these new QSBS rules apply to your specific situation? Connect with our founder to discuss your specific exit scenario.
Schedule an Exit Strategy Discussion
Disclaimer: This information is for educational purposes only and does not constitute legal or tax advice. QSBS rules are complex and subject to specific requirements and limitations. Consult with qualified tax and legal professionals regarding your specific situation.
About Keystone Global Partners: We specialize in comprehensive exit planning and wealth management for ultra-high-net-worth venture-backed tech founders. Our founder, Peyton, is recognized as one of the leading QSBS specialists in the country, with deep expertise in practical QSBS strategy implementation and advanced tax planning for $20+ million exits.
The Section 1202 tax exclusion for Qualified Small Business Stock (QSBS) has evolved dramatically from its original 1993 introduction to today’s One Big Beautiful Bill Act expansion. If you’re a venture-backed founder researching your exit strategy, understanding the exact exclusion percentages and eligibility timeline could save you millions in federal taxes.
This definitive QSBS exclusion chart breaks down every tier, effective date, and exclusion cap so you can optimize your tax strategy regardless of when you acquired your stock.
The Complete QSBS Exclusion Timeline
Your potential tax savings depend entirely on when you acquired your stock. A difference of just one day can mean the distinction between paying zero taxes and owing millions to the IRS.
Pre-OBBBA Rules (Stock Issued Before July 5, 2025)
| Acquisition Period | Exclusion % | Holding Period Required | Effective Tax Rate | Per-Person Cap |
|---|---|---|---|---|
| August 11, 1993 – February 17, 2009 | 50% | 5 years | ~17.8% | $10M or 10x basis |
| February 18, 2009 – September 27, 2010 | 75% | 5 years | ~8.9% | $10M or 10x basis |
| September 28, 2010 – July 4, 2025 | 100% | 5 years | 0% | $10M or 10x basis |
Post-OBBBA Rules (Only Applies to Stock Issued After July 4, 2025)
| Holding Period | Exclusion % | Effective Tax Rate | Per-Person Cap |
|---|---|---|---|
| 3+ years (but <4) | 50% | ~15.9% | $15M or 10x basis |
| 4+ years (but <5) | 75% | ~7.95% | $15M or 10x basis |
| 5+ years | 100% | 0% | $15M or 10x basis |
Note: Effective tax rates reflect a 28% capital gains rate and 3.8% Net Investment Income Tax (NIIT) on the taxable (non-excluded) portion of QSBS gains. For Pre-OBBBA QSBS, calculations also include a 7% Alternative Minimum Tax (AMT) preference adjustment.
How the One Big Beautiful Bill Act Changes Everything
The OBBBA, signed into law on July 4, 2025, represents the most significant expansion of QSBS benefits since the provision was created.
Here’s what changed for venture-backed founders:
1. Shortened Holding Period Benefits
Previously, you needed to wait five full years to see any QSBS tax benefit. The new law creates a tiered system starting at just three years:
- Three-Year Scenario: A founder with $20 million in QSBS gains (held 3+ years) would exclude $10 million and pay taxes on $10 million at 31.8% (28% + 3.8% NIIT) = $3.18 million in federal taxes instead of $6.36 million without QSBS.
- Four-Year Scenario: The same founder holding for 4+ years would exclude $15 million, paying taxes on only $5 million = $1.59 million in federal taxes.
- Five-Year Scenario: Full exclusion means zero federal tax on the entire $20 million gain.
2. Increased Exclusion Caps
The per-issuer gain cap jumped from $10 million to $15 million for stock issued after July 4, 2025. This 50% increase acknowledges inflation since the original 1993 cap and will be indexed for inflation beginning in 2027.
3. Higher Asset Threshold for Qualifying Companies
Companies can now have up to $75 million in aggregate gross assets (up from $50 million) at the time of stock issuance and still qualify for QSBS treatment. This expanded threshold means later-stage startups and scale-ups can continue issuing QSBS-eligible equity longer into their growth trajectory.
Critical Planning Considerations for Founders
Understanding the exclusion percentages is just the beginning; the real complexity lies in how these rules interact with your specific stock acquisition timeline, and getting the details wrong can cost you millions in unnecessary taxes.
Acquisition Date Matters More Than Sale Date
Your QSBS exclusion percentage is locked in based on when you acquired the stock, not when you sell it. A founder who received stock in 2015 gets 100% exclusion (after 5 years) even if they sell in 2030, while stock issued in 2026 follows the new tiered system.
Mixed Stock Positions Require Meticulous Records
Many founders will have multiple tranches of stock with different acquisition dates and exclusion rules. Consider this scenario:
Founder Sarah’s Stock Portfolio:
- 1 million shares acquired December 2020 (100% exclusion after 5 years)
- 500,000 shares acquired August 2025 (tiered exclusion system)
- 200,000 shares from option exercises in 2026 (tiered exclusion system)
Each tranche follows its own rules, making precise record-keeping essential for optimal tax planning.
The $75 Million Asset Test Creates New Opportunities
Previously, a company raising a large Series B might have exceeded the $50 million asset threshold, disqualifying future stock issuances from QSBS treatment. The increase to $75 million provides more runway for equity compensation and additional fundraising while maintaining QSBS eligibility.
State Tax Considerations
While this chart focuses on federal exclusions, remember that state treatment varies significantly:
- California: Does not conform to federal QSBS exclusion
- New York: Conforms, and follows the federal treatment
- Florida/Texas/Nevada: No state income tax makes federal exclusion even more valuable
Strategic Planning Before Your Exit
The difference between maximizing and missing your QSBS benefits often comes down to proactive planning decisions you make today, not scrambling to understand the rules after you’ve already signed a term sheet.
For Pre-Exit Founders (0-3 Years Out)
If you’re still 12-36 months from a liquidity event, consider:
- Stock Documentation Review: Ensure all acquisition dates are properly documented, and whether shares meet the original issuance requirement
- Additional Equity Opportunities: Consider whether exercising options or receiving additional equity grants makes sense under the new OBBBA rules
- State Domicile Planning: Evaluate whether relocating to a favorable state jurisdiction aligns with your timeline
For Active Exit Situations
If you have an LOI on the table:
- Mixed Tranche Analysis: Calculate the optimal tax treatment for each issuer/stock position
- Timing Flexibility: Understand whether delaying the exit by 3-12 months could trigger a more favorable exclusion tier
- Rollover Opportunities: Consider Section 1045 rollovers for non-excluded gains
Beyond the Exclusion: Advanced QSBS Strategies
Sophisticated founders aren’t just focused on the basic exclusion percentages.
Advanced strategies include:
| Strategy | Description | Purpose/Benefit |
|---|---|---|
| QSBS Stack Acceleration | Using family members, trusts, and other entities to multiply the per-person exclusion caps beyond the $10-15 million individual limits. | Increases total QSBS exclusion by leveraging multiple qualified holders. |
| Section 1045 Reinvestment | Rolling non-excluded portions of QSBS gains into new qualified investments to defer taxation while potentially accessing higher future exclusions. | Defers taxes and allows for possible future tax-free gains by reinvesting in other qualifying stock. |
| Estate Planning Integration | Incorporating QSBS planning with generation-skipping trust strategies for multi-generational wealth transfer. | Enables tax-efficient transfer of wealth across generations, maximizing long-term benefits. |
Your Next Steps
The QSBS exclusion landscape has never been more complex, or more opportunity-rich. With the OBBBA’s expansion creating multiple exclusion tiers and higher caps, the potential federal tax savings for venture-backed founders can easily reach into eight figures.
But, navigating this complexity requires expertise in both the technical tax rules and the practical realities of startup exits. Getting the planning wrong doesn’t just cost money; it can cost millions in unnecessary taxes. If you’re a venture-backed founder with a potential exit on the horizon, the time for QSBS planning is now, not after you’ve signed the definitive agreement.
Want to explore how these new QSBS rules apply to your specific situation? Connect with our founder to discuss your specific exit scenario.
Disclaimer: This information is for educational purposes only and does not constitute legal or tax advice. QSBS rules are complex and subject to specific requirements and limitations. Consult with qualified tax and legal professionals regarding your specific situation.
About Keystone Global Partners: We specialize in comprehensive exit planning and wealth management for ultra-high-net-worth venture-backed tech founders. Our founder, Peyton, is recognized as one of the leading QSBS specialists in the country, with deep expertise in practical QSBS strategy implementation and advanced tax planning for $20+ million exits.
