QSBS (Section 1202) for founders: what changed in 2025 and how it works

For US founders, Qualified Small Business Stock may be the most valuable tax rule of all. If your company's shares qualify and you hold them long enough, a large part of the gain when you sell can be excluded from federal tax. A 2025 law changed the limits for newer stock. This guide explains the rule and the changes in plain English. It is general information, not tax advice: QSBS has many conditions, and an adviser should confirm yours.

• Qualified Small Business Stock (QSBS, §1202)Exclude up to $15M (or 10× basis) of capital gainsGov. scheme · U.S. Internal Revenue Service · United States

The rule in short

Section 1202 of the US tax code lets individuals and some other holders exclude part or all of the capital gain on stock in a qualifying company, when the stock was issued by the company itself and held for a minimum period.

What changed in 2025

Law firm and accounting summaries of the One Big Beautiful Bill Act agree on these points for stock issued after 4 July 2025:

• A tiered holding period: a 50% exclusion after 3 years, 75% after 4 years and 100% after 5 years. Previously the full exclusion needed 5 years.
• A higher cap: the per-issuer exclusion limit rises from USD 10 million to USD 15 million (or 10 times the aggregate adjusted basis), with future inflation adjustments.
• A higher company size test: the company's aggregate gross assets can be up to USD 75 million at issuance.

Stock issued on or before 4 July 2025 stays under the earlier rules. One source says the taxed portion under the 3 and 4 year tiers is subject to a special 28% rate. Another source has not confirmed this, so ask your adviser.

What makes stock qualify

The main conditions, summarised from the rule:

1. A domestic C-corporation. Not an LLC taxed as a partnership, and not an S-corporation.
2. Original issuance. You must acquire the stock from the company, for money, property or services, not buy it from another shareholder.
3. Size. The company's gross assets must be under the limit when the stock is issued.
4. An active qualified business. A large share of its assets must be used in an active trade or business. Some fields are excluded, including many professional services, finance, hospitality and farming.
5. Holding period. You hold the stock for at least the minimum time.

Why this shapes your first decisions

• Incorporate as a C-corporation early. Converting later restarts the clock for new shares.
• Issue founder stock at formation, and keep records of the date, the price paid and the company's gross assets at the time.
• Mind redemptions. Share buybacks around the time of issuance can disqualify stock.
• Consider the 83(b) election when stock is subject to vesting. Tools such as Stripe Atlas include the filing: see setting up a US company.

Founders outside the US

QSBS applies to US federal tax. If you are not a US taxpayer, your own country's rules decide the benefit, so get advice in both countries before you set up a US parent.

Related

See startup credits in the US and the SBIR guide.

• Stripe Atlas$500 incorporation + $100k+ in partner perksDiscount · Stripe · Global, United States
• SBIR / STTR ProgramsNon-dilutive awards, typically $150k–$2M+Grant · U.S. Government (SBA) · United States
• Y Combinator$500k investment + $1M+ perksAccelerator · Y Combinator · United States, Global

Sources

• Perkins Coie: changes to QSBS under the One Big Beautiful Bill Act
• Davis Wright Tremaine: QSBS and the new law
• IRS

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