The One Big Beautiful Bill Act, signed into law on July 4, 2025, has made the most significant changes to Section 1202 of the Internal Revenue Code in fifteen years.
The legislation, formally designated Pub. L. No. 119-21, introduced three principal amendments affecting qualified small business stock, known as QSBS, under IRC sections 1202 and 1045.
Those changes include a tiered gain exclusion tied to shorter holding periods, a raised per-issuer dollar cap, and an increased aggregate gross-asset ceiling for qualifying companies.
The per-issuer cap has risen from $10 million to $15 million, while the gross-asset ceiling has increased from $50 million to $75 million under the new framework.
Both figures are indexed for inflation, with the per-issuer cap adjusted for taxable years beginning after 2026 and the gross-asset ceiling adjusted for stock issued in calendar years after 2026.
Critically, the amendments apply only to QSBS issued after July 4, 2025, meaning stock issued on or before that date continues to be governed by the prior-law rules.
Practitioners must therefore analyze QSBS under a two-regime framework keyed to the date of original issuance, not the date a particular holder acquired the shares, a distinction that matters for transferees who tack a donor’s or decedent’s holding period under section 1202(h).
The portion of gain that is not excluded is classified as section 1202 gain, taxed at a maximum rate of 28 percent rather than the 20 percent long-term capital gains rate, and it remains subject to the 3.8 percent net investment income tax.
A taxpayer exiting at three years on a $2 million gain excludes $1 million and pays roughly $318,000 on the balance, against $238,000 at the ordinary long-term rate.
The tiered exclusion represents a real benefit for qualifying investors, but it is less generous than the headline exclusion percentages might initially suggest to founders or early-stage investors.
A founder who incorporated in 2023 and closed a priced round in March 2026 now owns two different tax assets in the same company, each governed by separate rules.
The shares issued at formation fall under one regime, while the shares issued in the priced round carry a different dollar cap, a different gross-asset ceiling, and a holding period that pays out in three stages rather than one.
Neither block of stock is uniformly more advantageous than the other, and both must be tracked separately for the entire life of the investment.
Legal practitioners advising startup founders, early employees, and investors must now build a rigorous dual-regime analysis into their planning from the earliest stages of a company’s life cycle.
This four-part series by Filip M. Rams in the National Law Review walks practitioners through the full QSBS framework, covering the value of the benefit, company qualification, stock qualification, and structural fixes when the rules are not met.