QSBS is one of the more valuable tax benefits available to startup employees and founders, but eligibility depends on specific requirements about the company, the stock, and how long you’ve held it, and those requirements now differ depending on exactly when your stock was issued. This post covers what QSBS actually does, the two different rule sets currently in effect, and how to think about whether your shares might qualify.
What is QSBS?
QSBS stands for Qualified Small Business Stock, and it refers to stock that, if it meets a set of requirements under Section 1202 of the tax code, lets you exclude some or all of your capital gain from federal income tax when you sell. The requirements cover the type of company (a domestic C-corporation), how the stock was acquired (generally at original issuance, not purchased secondhand), and how the company’s size is measured at the time of issuance.
What changed for QSBS in 2025?
Legislation enacted on July 4, 2025 made several taxpayer-favorable changes to Section 1202, but only for stock acquired after that date. Stock acquired on or before July 4, 2025 continues to follow the original rules. This creates two parallel systems depending on your stock’s acquisition date, and the two can’t be mixed for the same shares.
What are the rules for stock acquired on or before July 4, 2025?
Under the original rules, you need to hold the stock for more than five years to exclude any gain, and if you meet that threshold, you can potentially exclude 100% of your gain (the exact percentage depends on when the stock was originally issued, since the exclusion percentage itself was increased in stages over the years). The company also needed to have aggregate gross assets under $50 million at the time your stock was issued. The exclusion is capped at the greater of $10 million or 10 times your basis in the stock.
What are the rules for stock acquired after July 4, 2025?
The new rules replace the all-or-nothing five-year requirement with a tiered structure: 50% of gain excluded after a three-year hold, 75% after four years, and 100% after five years. The company size threshold was also raised, to $75 million in aggregate gross assets at issuance, and the exclusion cap was increased to the greater of $15 million or 10 times your basis. Gain that isn’t excluded under the tiered system is generally taxed at a 28% rate plus the 3.8% net investment income tax, rather than standard capital gains rates.
How do I know if my company qualifies as a “qualified small business”?
The core test is whether the company’s aggregate gross assets stayed under the relevant threshold ($50 million or $75 million, depending on your stock’s acquisition date) at all times up through immediately after your stock was issued. Aggregate gross assets is a specific tax concept, roughly cash plus the adjusted basis of other property the company holds, and it’s measured at the company level, not something you can typically verify yourself without company records. Ask your equity plan administrator or the company’s finance team directly rather than assuming based on the company’s funding round valuation, which is a different measure entirely.
Can I improve my QSBS position by exchanging older stock for newer stock?
Generally no, and attempting this can be risky. Exchanging previously issued stock for newly issued shares specifically to access the more favorable post-2025 rules does not typically work, and can jeopardize your QSBS status on that stock entirely. The rules that apply to your shares are generally locked in based on your original acquisition date.
Worked example
Say you exercised ISOs and acquired shares on August 1, 2025, after the new rules took effect, and your company met the $75 million gross asset threshold at that time. You hold the shares for four years before selling, realizing a $2 million gain.
Under the tiered system, holding for four years qualifies you to exclude 75% of that gain, or $1.5 million, from federal tax. The remaining $500,000 would generally be taxed at the 28% rate plus the 3.8% net investment income tax, rather than standard long-term capital gains rates. Had you waited one more year to hit the five-year mark, the full $2 million could potentially have been excluded, subject to the overall cap.
FAQ
Does every startup automatically qualify as a “qualified small business”? No. It depends on the company’s aggregate gross assets at the time your stock was issued staying under the relevant threshold, along with other requirements like being a domestic C-corporation.
Do stock options themselves qualify for QSBS treatment? No. QSBS applies to the stock you receive when you exercise, not to the unexercised option itself, and the holding period generally starts when you acquire the actual shares.
What happens if I sell before meeting the holding period? You wouldn’t receive any QSBS exclusion, and the gain would be taxed under standard capital gains rules based on how long you held the shares.
Does the QSBS rule change apply to stock I already hold? No. Stock acquired on or before July 4, 2025 keeps the original all-or-nothing five-year rule. Only stock acquired after that date follows the new tiered system.
Is QSBS eligibility something I can check myself? Not entirely. Whether your company meets the gross asset threshold is a company-level determination, so it’s worth asking your company’s finance team or a tax professional directly rather than guessing.
What to do next
QSBS is a genuinely valuable but detailed area of the tax code, and this is a fast-moving area given the 2025 changes, so confirming your specific situation with a tax professional is worth doing before making decisions based on it. You can model your own holding-period timeline at movewealth.io.
MoveWealth is not a broker-dealer, investment adviser, or lender. This is educational content, not financial, tax, or legal advice. Consult a qualified professional about your specific situation.