Qualified Small Business Stock (QSBS): What the 2025 Law Changes Mean for Investors and Founders

Navigating the world of startup equity and tax planning can feel overwhelming, but opportunities like Qualified Small Business Stock (QSBS) make it worthwhile for founders and investors alike. With new updates from the One Big Beautiful Bill Act of 2025, QSBS rules have undergone significant changes — from higher gain exclusions to shorter holding periods — creating fresh planning opportunities for those invested in or considering C-corporation stock. In this article, we’ll break down what QSBS is, why it matters, and how the recent law may impact your strategy moving forward. If you have questions about how these changes apply to your situation, the team at Sequoia Financial Group is here to help.

What Is Qualified Small Business Stock (QSBS)?

Qualified Small Business Stock refers to shares issued by a domestic C-corporation that meets specific requirements under Internal Revenue Code § 1202. To qualify, the corporation and the shareholder must adhere to rules around business type, asset size, active business operations, and how and when the stock was acquired and held. When conditions are met, the holder can exclude a portion (or all) of the capital gain upon sale.1

Why QSBS Is Important

• Potential Significant tax savings: Successfully using QSBS can mean excluding (i.e. not paying tax on) large amounts of gain when you sell stock in a qualifying small business.
• Encourages investment in early-stage companies: The QSBS regime may provide a strong incentive for founders, angel investors, and venture capital, since it enhances after-tax return if the business succeeds.
• Exit/planning flexibility: Knowing these rules helps owners or investors structure investments, choose entity form, and plan exits.

What the New Laws Change — Section 70431 (One Big Beautiful Bill Act, as of July 4, 2025)

The “One Big Beautiful Bill Act” (OBBBA), enacted July 4, 2025, includes Section 70431, which makes several significant updates to § 1202’s QSBS rules.2 Here are the key changes:

Other important points:

• The changes only apply to QSBS acquired after July 4, 2025. Stock acquired before that date (“pre-enactment”) is subject to the previous rules (i.e., 5-year wait, etc.).10
• The new shorter-holding period exclusions (50% / 75%) are not counted as Alternative Minimum Tax (AMT) preference items.11

How to Use This & What to Watch Out For

• Track acquisition dates carefully, especially if you hold blocks of QSBS from before and after July 4, 2025 — the rules differ.
• Plan exits more flexibly: If you anticipate selling sooner, the new 3- or 4-year thresholds could allow partial exclusion, meaning earlier liquidity with tax benefit.
• Watch asset thresholds: Corporations near or just over the old $50 million ceiling may now qualify for post-July 4 issuances under the $75 million cap.
• State tax conformity: Not all states follow federal QSBS rules. Even though federal law gives exclusion, state taxes might not allow it.12

Conclusion

QSBS has long been a powerful tool for investors, founders, and startups. With the passage of Section 70431 under the One Big Beautiful Bill Act, the benefits have been enhanced — especially through shorter holding periods and a higher cap on excludable gain. If you’re dealing with startup equity, C corporations, or planning exits, the new law makes revisiting your strategy essential.