The landscape of QSBS has undergone a major shift with the introduction of the new QSBS tiered exclusion implemented through the One Big Beautiful Bill Act (OBBBA), signed into law by President Trump on July 4, 2025. The QSBS 3 4 5 year rule significantly reduces the traditional five-year “all or nothing” holding period requirement, creating significant opportunities for founders and investors through these new QSBS reduced holding periods.
Changes to QSBS Holding Period 2025
The most significant change introduced by OBBBA is the implementation of a tiered exclusion system for QSBS acquired after July 4, 2025. This new QSBS holding period 2025 structure eliminates the previous “five-year cliff” requirement, replacing it with a more flexible approach that allows earlier access to substantial tax benefits.
The New QSBS Tiered Exclusion Framework
Under the new OBBBA QSBS holding period rules, founders and investors can now access different levels of capital gains exclusion. Here is how the QSBS 3 4 5 year rule plays out:
QSBS 50% exclusion after 3 years: Shareholders who hold qualifying stock for at least three years can exclude 50% of their capital gains from federal taxation. This represents a dramatic shift from the previous requirement of holding stock for more than five years to receive any exclusion benefit.
QSBS 75% exclusion after 4 years: After holding QSBS for at least four years, shareholders become eligible for a 75% exclusion of their capital gains. This intermediate tier provides substantial tax savings while still offering incentives for longer-term holding.
QSBS 100% exclusion after 5 years: The traditional 100% exclusion remains available for shareholders who hold their QSBS for five years or more. This maintains the maximum benefit for long-term investors while providing earlier access to partial benefits.
Enhanced Benefits Beyond QSBS Reduced Holding Periods
The OBBBA doesn’t just reduce holding periods. It substantially expands the overall benefits available to QSBS holders:
Increased Per-Taxpayer Exclusion Cap
The legislation increases the per-issuer gain exclusion cap from $10 million to $15 million for QSBS acquired after July 4, 2025. Beginning in 2027, this cap will be adjusted annually for inflation, ensuring the benefit maintains its value over time.
Expanded Company Eligibility with Higher Asset Thresholds
The gross asset threshold for qualifying as QSBS has been increased from $50 million to $75 million. This expansion allows larger, more mature startups to issue QSBS, significantly broadening the pool of companies that can offer these tax advantages to their founders, employees and investors.
Alternative Minimum Tax Relief
Importantly, gains excluded under the new tiered system are not considered preference items for Alternative Minimum Tax (AMT) purposes. This eliminates a significant complexity that previously affected some QSBS holders, particularly those with older stock issued before 2010.
Strategic Implications for Founders
The new QSBS reduced holding period rules create several strategic advantages for founders, investors, and companies:
Enhanced Liquidity Options
Founders no longer face the stark choice between waiting five years for QSBS tax benefits or paying full capital gains taxes on earlier exits, assuming a 1045 Rollover was not implemented. The tiered system allows for partial tax benefits at the three and four-year marks.
Improved Fundraising Dynamics
Raising the asset threshold to $75 million allows companies to secure larger and or later-stage funding rounds, while potentially retaining the ability to issue QSBS. This change is especially beneficial for larger startups or capital-intensive businesses that previously lost QSBS eligibility after surpassing the $50 million gross asset test limit.
Exit Strategy Flexibility
The new tiered structure offers founders greater flexibility in timing their exits. Whether facing acquisition offers, tender offers, or secondary sale opportunities, founders can now access meaningful tax benefits at earlier stages of their company’s lifecycle.
Key Considerations
New QSBS
It’s crucial to understand that these enhanced benefits apply only to QSBS issued after July 4, 2025. Existing QSBS holders remain subject to the previous rules, and no, you can’t exchange old QSBS for new QSBS to benefit from the updated rules.
Maintaining Qualification Requirements
While there are now reduced QSBS holding periods, all other qualification requirements remain in place. Companies must still:
- Be domestic C corporations in a non-excluded business.
- Meet the active business requirement throughout the QSBS holding period 2025 and beyond.
- Satisfy the original issuance requirement.
- Avoid disqualifying redemptions.
- Meet the gross asset threshold (now $75 million).
Tax Rate Implications
For the partial exclusions, the non-excluded portion of gains is taxed at the 28% capital gains rate rather than the standard 23.8% long-term capital gains rate. Each non-excluded portion of the gains also bears its proportional share of NIIT (3.8%). This means:
- 50% QSBS tiered exclusion: Effective tax rate of approximately 15.9%
- 75% QSBS tiered exclusion: Effective tax rate of approximately 7.95%
- 100% QSBS exclusion: No federal tax liability 0%
FAQs
What is the QSBS 3 4 5 year rule exclusion under OBBBA?
Under the OBBBA, for QSBS acquired after July 4, 2025, investors receive a 50% capital gains exclusion if they hold the stock for at least 3 years, 75% if held for 4 years, and 100% if held for 5 years or more. The portion of gain not excluded is taxed at a 28% federal rate plus the proportional amount of NIIT (3.8%) The maximum per-issuer exclusion cap also increases to $15 million per taxpayer, indexed for inflation. These new rules give investors more flexibility to realize partial tax benefits before reaching the five-year mark.
How does the OBBBA shorten the QSBS holding period 2025 and beyond?
The OBBBA shortens the OBBBA QSBS holding period by introducing tiered exclusions: investors can now exclude 50% of gains after holding qualified stock for 3 years, 75% after 4 years, and 100% after 5 years. Previously, only stock held for at least 5 years qualified for any exclusion. The non-excluded portion is taxed at a 28% federal rate plus the proportional amount of NIIT (3.8%). These changes give investors earlier access to significant tax benefits and greater flexibility when planning exits.
What are the QSBS 3-year vs. 4-year vs 5-year exclusion benefits?
Under the OBBBA, QSBS holders can now access capital gains exclusions sooner:
- 50% QSBS tiered exclusion if sold after 3 years
- 75% QSBS tiered exclusion if sold after 4 years
- 100% QSBS tiered exclusion if sold after 5 years or more
The portion of the gain not excluded is taxed at 28%, plus the pro rata portion of the 3.8% NIIT. This results in effective federal tax rates of:
- 15.9% if held for 3 years
- 7.95% if held for 4 years
- 0% if held for 5 years or more
These new rules allow investors to benefit from meaningful tax savings without needing to hold for the full 5 years. Additionally, the per-issuer exclusion cap will increase to $15 million for stock acquired after July 4, 2025.
What is the QSBS phased gain exclusion under OBBBA?
The OBBBA creates a phased gain exclusion for QSBS acquired after July 4, 2025, offering investors increasing tax benefits based on how long they hold the stock. Investors can exclude 50% of eligible gains if they sell after 3 years, 75% after 4 years, and 100% after 5 years. The portion of the gain not excluded is taxed at 28%, plus its portion of the 3.8% Net Investment Income Tax. This phased approach rewards shorter OBBBA QSBS holding periods, when compared to the Pre-OBBBA rules, while still allowing for significant tax savings if the five-year threshold is reached.
Can I exchange my pre-July 4, 2025 QSBS for new QSBS to benefit from the tiered exclusion?
No, the OBBBA explicitly prevents this. You cannot exchange existing QSBS for new QSBS to take advantage of the enhanced rules.
Do the new rules apply to stock options granted before July 4, 2025?
The key date is when the stock is actually issued, not when options are granted. If you exercise stock options after July 4, 2025, and the company qualifies as QSBS at that time, the resulting stock would be subject to the new rules.
Are there any state tax implications?
Yes, the new OBBA QSBS holding period benefits differ by state. Some states, like California, Pennsylvania, and New Jersey, do not align with the federal QSBS exclusion, while others offer partial or full conformity. If a state conforms, you can enjoy state tax benefits in addition to federal ones. Keep in mind that federal rule changes don’t automatically affect state treatment. Notably, starting January 1, 2026, New Jersey will align with the federal QSBS exclusion.
What happens if I sell my QSBS before reaching the three-year minimum?
If you sell before three years, you won’t qualify for any QSBS exclusion under the new (or old) rules. However, you may still be able to use IRC Section 1045 to roll over the gain into new QSBS within 60 days.
How does the increased asset threshold affect existing companies?
The $75 million gross asset threshold applies at the time of stock issuance. Companies that previously couldn’t issue QSBS due to the $50 million limit may now be able to do so, provided they meet all other requirements and their gross assets are below $75 million before and after stock issuance.
