Big Changes to QSBS in 2025: What Founders and Investors Need to Know

If you’re a startup founder, early investor, or anyone holding equity in a C corporation, the Qualified Small Business Stock (QSBS) rules just got a major upgrade under the One Big Beautiful Bill Act (OBBBA) — signed into law in July 2025.

QSBS has always been one of the most powerful tax incentives for early-stage businesses, allowing qualifying shareholders to exclude up to $10 million (or 10x their investment) in capital gains from federal taxes. Now, it’s even better — and a little more flexible.

What Changed Under the New Law

For stock issued after July 4, 2025, the QSBS program is expanded in several important ways:

• Partial Tax Exclusion for Earlier Exits:
  You no longer have to wait five years to get any benefit. Now, if you sell after:

  • 3 years: 50% of your gain is excluded

  • 4 years: 75% excluded

  • 5+ years: 100% excluded

• Higher Exclusion Cap:
  The old cap was the greater of $10 million or 10x your investment. The new law raises that to $15 million or 10x basis, indexed for inflation starting in 2027.

• Higher Eligibility Threshold:
  Companies can now have up to $75 million in gross assets (up from $50 million) and still qualify. This broadens the benefit to larger startups approaching later-stage funding.

• Alternative Minimum Tax (AMT) Relief:
  QSBS gains are no longer treated as AMT preference items — simplifying tax planning for founders and investors with multiple holdings.

What Stays the Same

The core requirements of QSBS haven’t changed. To qualify, the company must still:

• Be a C corporation at the time the stock is issued.

• Use at least 80% of its assets in an active trade or business.

• Issue the stock directly to the investor (not as a secondary sale).

S-corporations, LLCs, and partnerships still do not qualify.

Why This Matters for Founders

The new law gives founders and investors far more flexibility — and incentive — to hold their stock. You can now realize partial tax relief even if an acquisition or liquidity event happens sooner than expected.

However, because the changes only apply to stock issued after July 4, 2025, founders and investors will need to track which shares qualify under which regime. That means careful documentation, cap table accuracy, and legal coordination during future fundraising rounds.

What to Do Now

If you already hold stock issued before July 2025, your current QSBS benefits stay the same — you’re grandfathered in under the old rules.

If you’re forming a new company or planning a fundraising round in late 2025 or beyond, now’s the time to:

1. Confirm your entity structure (must be a C-corp).

2. Document original issuance and fair market value.

3. Plan future equity rounds to ensure new shares qualify for QSBS.

4. Track holding periods separately for pre- and post-July 2025 stock.

At WADR Law

We help founders, investors, and creative entrepreneurs structure their companies and investments to take full advantage of programs like QSBS. With the new rules in effect, proper planning could mean millions in tax savings at exit.

If you’re forming a new venture or preparing for a financing round, reach out to discuss how the QSBS changes affect your equity strategy.