The One Big Beautiful Bill Act (OBBBA), signed into law on July 4, 2025, establishes new phased-in benefits for Qualified Small Business Stock (QSBS) held for at least three years. Prior to the OBBBA’s amendments, Section 1202 of the Internal Revenue Code (IRC) limited gain exclusion to the sale or exchange of QSBS held for more than five years. Now, QSBS issued after the OBBBA’s enactment date will be subject to tiered exclusion percentages, while the prior rules remain in effect for previously issued shares.

QSBS Exclusion Percentage and Rate Regime: Pre- and Post-OBBBA

Gain exclusion under Section 1202 is available on a per-taxpayer, per-issuer basis. Section 1202(b) generally provides that each taxpayer excludes eligible gain with respect to QSBS in each issuing corporation, based on the applicable exclusion percentage and subject to the exclusion limit. The applicable exclusion percentage depends on the date the QSBS was originally acquired. The amendments apply the rules in IRC Section 1223 for the acquisition date, such that QSBS issued prior to the OBBBA cannot be exchanged for QSBS subject to the newly modified holding period rules.

For QSBS Issued Prior to the OBBBA

The applicable exclusion percentages remain:

• 50% for stock acquired between August 11, 1993, and February 17, 2009;
• 75% for stock acquired between February 18, 2009, and September 27, 2010;
• 100% for stock acquired on or after September 28, 2010.

Although the specified percentage is excluded for federal income tax purposes, the non-excluded “Section 1202 gain” is taxed at a maximum 28% rate, rather than the 20% preferential long-term capital gain rate. Additionally, 7% of the excluded gain is treated as an alternative minimum tax (AMT) preference item. In each case, the stock must be held for more than five years if acquired on or before July 4, 2025.

For QSBS Issued After the OBBBA

A tiered exclusion schedule applies based on the holding period starting on or after July 5, 2025:

• 50% for stock held at least three years;
• 75% for stock held at least four years;
• 100% for stock held five or more years.

Any non-excluded “Section 1202 gain” is still taxed at the 28% rate, but there is no related AMT adjustment on the partial exclusion.

Partial Gain Exclusion Mechanics

The operation of the applicable limit with a partial exclusion can be a source of confusion. Prior to the OBBBA, Section 1202(b)(1) limited the amount of eligible gain on stock of a particular corporation that “may be taken into account [for exclusion] by the taxpayer under subsection (a) for the taxable year” to the greater of:

• $10 million — or $5 million for married taxpayers filing separately — reduced by any amount previously excluded for that corporation’s stock; or
• Ten times the aggregate basis of the qualified corporation’s stock sold during the year.

Post-OBBBA, the per-taxpayer limitation for QSBS acquired on or after July 5, 2025, increases to $15 million, subject to inflation adjustments for tax years after 2026. However, the statute retains the ambiguous phrase “gain which may be taken into account under subsection (a)” for purposes of the limit.

As amended, “eligible gain” includes any gain from the sale or exchange of QSBS held at least three years (or more than five years for stock acquired before the OBBBA’s enactment). The phrase “gain which may be taken into account” could be interpreted in two ways:

It refers to the full amount of eligible gain on the disposition at the applicable percentage, with the exclusion limit applied afterward; or

It refers only to the portion of gain eligible for exclusion under the limit subject to the applicable percentage.

Whether the partial exclusion percentage or gain exclusion limit applies first can be material. Potential tax liability may vary significantly depending on how the statute is read.

Example:

A taxpayer sells post-OBBBA shares held for three years for $40 million. The taxpayer originally received the shares as a founder at a negligible cost basis, triggering $40 million in eligible gain on the sale. 

• Under the first reading, the taxpayer excludes 50% of the first $30 million, or $15 million, with the remaining $25 million taxed at 28%.
• Under the second reading, the taxpayer applies the 50% exclusion to the $15 million limit, excluding only $7.5 million, with $32.5 million taxed at 28%.

Example:

That taxpayer instead sells post-OBBBA shares for $40 million after four years.

• Under the first reading, the taxpayer excludes 75% of the first $20 million, or $15 million, with the remaining $25 million taxed at 28%.
• Under the second reading, the taxpayer applies the 75% exclusion to the $15 million limit, excluding only $11.25 million, with $28.75 million taxed at 28%.

The same question can be raised in the context of a ten-times basis limitation.

Example:

A taxpayer sells post-OBBBA shares held for three years for $40 million The taxpayer originally purchased the shares as an investor for $4.5 million, triggering $35.5 million in eligible gain on the sale.

• Under the first reading, the taxpayer excludes 50% of the first $90 million, or $45 million. No tax is due because the eligible gain is fully excluded.
• Under the second reading, the taxpayer applies the 50% exclusion to the $45 million limit, excluding only $22.5 million, with $13 million taxed at 28%.

Example:

That taxpayer instead sells post-OBBBA shares for $40 million after four years.

• Under the first reading, the taxpayer excludes 75% of the first $60 million, or $45 million, with no tax due.
• Under the second reading, the taxpayer applies the 75% exclusion to the $45 million limit, excluding only $33.75 million, with $1.75 million taxed at 28%.

While both interpretations are conceivable, the more literal reading of Section 1202(b)(1) seems to support the former: that the full gain is “taken into account,” and the exclusion percentage is first applied up to the dollar limit. Section 1202(a) plainly states that gross income does not include the applicable percentage of any gain from QSBS. The explanation on QSBS reporting in the latest available IRS Publication 550 also appears to allow for the position. However, the question is not addressed in the Treasury regulations, and the legislative history does not resolve the ambiguity.

Planning with Pre- and Post-OBBBA Shares

When a taxpayer holds low-basis QSBS issued both before and after the OBBBA’s enactment, it is generally advantageous to sell pre-OBBBA shares first in the case of dispositions across multiple tax years. This preserves the higher per-taxpayer exclusion limit for future use.

Example:

A taxpayer plans to sell $10 million of low-basis QSBS for liquidity in a secondary sale. Even if all shares are held for over five years, selling pre-OBBBA shares first is advisable. This order allows the taxpayer to use the $10 million exclusion and preserves the opportunity to exclude an additional $5 million on post-OBBBA shares in a later year. If the taxpayer instead sold the post-OBBBA shares first, the aggregate gain exclusion would be capped at the $10 million, with no further exclusion on the subsequent sale of pre-OBBBA shares.

Otherwise, the same principles for maximizing gain exclusion are available for QSBS after the OBBBA. Taxpayers can multiply the per-taxpayer exclusion limit through gift planning, and the ten-times basis exclusion limit has not been amended.