Congress just passed, and President Trump signed into law on July 4th, 2025, the One Big Beautiful Bill Act (OBBBA)—a sweeping package aimed at boosting American innovation and capital formation. Buried in the bill is Section 70431, which dramatically expands the Qualified Small Business Stock (QSBS) exclusion under IRC §1202. If you’re a founder, early-stage investor, or tax advisor, this is big news.

Here's a breakdown of the key impacts on QSBS:
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1. Reduced Holding Period with Tiered Benefits:

• Pre-OBBBA: You had to hold QSBS for at least five years to get any tax exclusion.
• Post-OBBBA (for stock issued after enactment): The law introduces a tiered system based on the holding period:
  • 3 years: 50% exclusion
  • 4 years: 75% exclusion
  • 5+ years: 100% exclusion (tax-free)

2. Increased Exclusion Limits:

• Pre-OBBBA: The maximum tax-free gain was $10 million or 10 times the taxpayer's basis, whichever was greater.
• Post-OBBBA (for stock issued after enactment): The maximum tax-free gain increases to $15 million or 10 times the taxpayer's basis, whichever is higher. Both limits will be indexed for inflation starting in 2027.

3. Higher Gross Asset Threshold:

• Pre-OBBBA: The issuing corporation's aggregate gross assets had to be $50 million or less for the stock to qualify as QSBS.
• Post-OBBBA (for stock issued after enactment): The aggregate gross asset threshold rises to $75 million, indexed for inflation beginning in 2027. This means more mature startups can remain QSBS-eligible longer.

Planning Implications

• Shorter hold, earlier tax break – Investors can exit after 3 years and still benefit.
• More issuers qualify – Higher asset threshold opens the door to later-stage startups.
• New cap, new strategy – The $15M exclusion makes QSBS more compelling for venture-scale investments.

Final Thoughts

The OBBBA’s overhaul of Section 1202 is founder- and investor-friendly. It rewards long-term growth capital while giving more flexibility for earlier exits.
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Note that to benefit from QSBS the investment must be in the form of equity or pseudo-equity (certain SAFE structures), not debt. Convertible Note investments do no "start the clock" on the QSBS holding period until the conversion event occurs, i.e. a priced round or some other qualifying event triggers conversion to Preferred or Common Stock. See the related article on Why SAFE Notes Are So Rapidly Overtaking Convertible Notes as the Structure of Choice for Pre-priced Rounds.

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