Comparing the OBBBA Provisions on Qualified Small Business Stock to Prior Law: Benefits and Drawbacks for Investors

Qualified Small Business Stock (QSBS) under IRC Section 1202 has long rewarded early investors in startups and small businesses with meaningful tax savings. The One Big Beautiful Bill Act (OBBBA)dramatically reshapes those benefits. Below, we compare the OBBBA to prior law and explain what the changes mean in practice.

QSBS Then vs. post-OBBBA

QSBS Under Previous Statute

Under prior law, investors who acquired C corporation stock through original issuance in a qualified small business and held it for at least five years could exclude up to 100% of the gain on sale, subject to limits. Eligibility hinged on three pillars: the company had to be a C corporation with no more than $50 million in gross assets at the time of issuance; the investor had to acquire stock directly from the issuer (not in a secondary purchase) for cash or property other than stock; and the company had to use at least 80% of its assets in an active business.

For stock acquired after Sept. 27, 2010, the exclusion generally rose to 100%, capped at the greater of $10 million or 10 times the investor’s adjusted basis. Older vintages carried 50% or 75% exclusions, but the five-year holding requirement was a hard line with no partial credit for selling earlier.

What OBBBA Changes

Shorter Holding Periods for Reduced Gain Exclusions

The OBBBA introduces a phased benefit for eligible stock issued post-enactment:

• QSBS held for three years before selling: 50% of gain excluded
• QSBS held for four years before selling: 75% of gain excluded
• QSBS held for five years before selling: 100% of gain excluded

This allows founders or investors the option to exit earlier than five years if that meets their strategic goals. Transitional rules preserve prior-law treatment for stock issued before July 4, 2025.

Example: If an investor sells post-OBBBA QSBS after four years for a $12 million gain (and the basis cap isn’t binding), $9 million would be excluded (75%), and $3 million would be taxable. Under prior law, the same four-year sale wouldn’t qualify at all. It is noteworthy that the tax rate on the QSBS taxable amount is 28% ($840,000 in the example), not the 20% long term capital gains rate ($600,000).

A Higher Company Asset Threshold

The gross assets at issuance threshold increases from $50 million to $75 million, with annual inflation adjustments beginning in 2027. More companies will qualify at the time of issuance, especially capital-intensive or fast-growing startups that would have brushed against the old ceiling.

A Larger Exclusion Cap

For post-OBBBA stock, the exclusion limit rises to the greater of $15 million or 10× basis, also indexed for inflation beginning in 2027. For successful exits, that extra $5 million (plus future indexing) can translate into material after-tax savings.  Again, it is noteworthy that the new law did not address per-issuer “stacking,” where investors with greater gain that the limits use various strategies to increase the number of shareholders eligible for the exclusion.

Grandfathering Preserved

Stock issued before July 4, 2025, keeps its original tax treatment. That means investors do not have to re-underwrite tax outcomes on their existing positions.

Practical Implications for Investors

More flexibility on exit timing. The phased holding-period relief allows investors to crystallize gains earlier when strategic or market conditions make sense, instead of waiting the full five years for any benefit.  Keep in mind that the tax rate on taxable gain is increased to 28%.

Broader eligibility at issuance. The higher $75 million cap pulls more issuers into QSBS territory. Founders and boards should confirm that they meet the cap at issuance and maintain active business compliance to protect investor eligibility.

Bigger tax shield for strong outcomes. The increased exclusion limit (and future indexing) raises the ceiling on tax-free gains for post-OBBBA investments, amplifying after-tax returns on outsized wins.

Documentation matters more than ever. The core mechanics have not changed: original issuance, C corporation status, active-business use of assets, and accurate tracking of gross assets at issuance. Investors should expect tighter diligence at entry and exit — and portfolio companies should maintain clean records to substantiate QSBS status.

Be aware of different tax treatments across your portfolio assets. Many investors will now hold a mix of pre- and post-OBBBA QSBS, each with different clocks and caps. Deal teams should model exits accordingly and coordinate with tax advisors to avoid surprises.

Bottom Line

OBBBA meaningfully sweetens QSBS for new investments — earlier exit options, a larger issuer-size runway, and a higher exclusion cap that grows with inflation. While the law closes some planning gaps and clarifies thresholds, the benefits still hinge on nailing the fundamentals: eligibility at issuance, active-business compliance, and meticulous records.

Work with your tax team and your portfolio companies to map the right holding period, preserve documentation, and capture the full value of the rules when a qualified sale comes into view.

For more information, connect with a CBIZ professional today.