On July 4, 2025, the tax landscape for startups, founders, and early-stage investors changed dramatically. With the passage of the One Big Beautiful Bill Act (“OBBBA”), Congress made significant changes to Section 1202 of the Internal Revenue Code, the provision that governs Qualified Small Business Stock (“QSBS”).
If you’re building, investing in, or advising startups, these changes open new opportunities while also adding new layers of complexity. At Kinetic Law, we help entrepreneurs and investors anticipate these shifts and plan strategically.
What QSBS Does
QSBS is a powerful tax incentive that allows founders, employees, and investors in qualifying C corporations to exclude capital gains from federal taxes when selling stock, provided certain requirements are met.
Previously, you had to hold QSBS for at least five years to exclude any gain, which often limited flexibility in fast-growing industries.
What Changed Under OBBBA
- Higher Exclusion Cap — The lifetime exclusion cap on capital gains taxes increased from $10 million to $15 million, with inflation adjustments. The alternative “10× basis” rule still applies.
- Holding Period Flexibility — Now, gains can be partially excluded earlier:
- 3 years → 50% exclusion
- 4 years → 75% exclusion
- 5+ years → 100% exclusion (unchanged)
Note: nonexcluded gains at the 3- and 4-year marks are taxed at 28% instead of 20%.
- Expanded Company Eligibility — The asset threshold rose from $50 million to $75 million, meaning more growth-stage startups now qualify.
- Effective Date — These new rules only apply to QSBS issued after July 4, 2025. Stock issued prior to July 4, 2025 remains under the previous regime.
Why It Matters for Startups & Investors
- Earlier liquidity is more viable. Founders and investors can now consider exits before year five with meaningful tax savings.
- Exit timing requires strategy. Earlier sales may trigger the higher 28% capital gains rate, making careful planning essential.
- More startups are eligible. The higher asset limit expands QSBS benefits to later-stage companies.
- Recordkeeping matters. You’ll need to track which shares are pre-OBBBA and which are post-OBBBA, since the rules differ.
Strategic Planning Opportunities
With the new QSBS rules, founders and investors should revisit:
- Exit planning to optimize tax outcomes
- Equity issuances to ensure QSBS eligibility
- Estate planning tools such as non-grantor trusts and gifting strategies
- State tax considerations, since not all states conform to federal QSBS law. Consequently, even if capital gains are excluded from federal tax, they still might be taxable at the state level, if the taxpayer lives in one of the non-conforming states.
How Kinetic Law Can Help
At Kinetic Law, we guide startups and investors through the complexities of QSBS planning, including:
- Structuring financings for QSBS eligibility
- Modeling outcomes under the new tiered rules
- Maintaining cap table and basis records
- Advising on exit timing and estate strategies
The One Big Beautiful Bill Act has made QSBS more valuable than ever, but also more nuanced. Whether you’re raising your next round or planning for a future exit, our team can help you align your strategy with the updated rules.
Contact Kinetic Law today to explore how these changes could shape your equity strategy and long-term tax savings.