If you’re a founder or early investor in a qualifying C corporation, the qualified small business stock (QSBS) exclusion under Section 1202 of the Internal Revenue Code has long been one of the most valuable tax benefits available for business owners. Laws enacted July 4, 2025, and known as the One Big Beautiful Bill Act (OBBBA), made several changes that expand those benefits for stock issued after that date.
Whether you’re planning a liquidity event or building toward one, understanding the new QSBS rules can help you make strategic decisions about timing, structuring, and coordinating your financial picture. These changes affect how much gain you can exclude, how long you need to hold your shares, and which companies can issue qualifying stock.
What changed
The OBBBA introduced three key changes to QSBS rules, all effective for stock acquired after July 4, 2025. Each change expands the benefit in a different way — more exclusion, faster access, and a broader universe of qualifying companies.
Tiered holding period
A tiered structure has replaced the previous five-year holding period for the full exclusion.
- Hold QSBS for at least three years to exclude 50% of the gain.
- Hold QSBS for four years to exclude 75%.
- Hold QSBS for five years for the full 100% exclusion.
The nonexcluded portion of gain at the three and four-year tiers is taxed at a 28% capital gains rate, plus the 3.8% net investment income tax when applicable, resulting in effective rates of approximately 15.9% and 7.95%, respectively.1
Higher per-issuer exclusion cap
The lifetime gain exclusion per issuer increased from $10 million to $15 million. The alternative 10-times-basis limitation remains unchanged, so taxpayers can still exclude the greater of $15 million or 10 times their adjusted basis. Both the $15 million cap and the gross-asset threshold are indexed for inflation beginning in 2027.
Expanded gross-asset threshold
The aggregate gross-asset limit for qualifying corporations increased from $50 million to $75 million, allowing larger companies to meet qualifications for QSBS. This change broadens the range of businesses whose stock can qualify, giving founders and investors more flexibility.
QSBS qualification requirements
For stock to qualify as QSBS:
- The issuing company must be a domestic C corporation and its aggregate gross assets cannot exceed $75 million at any time before or immediately after the stock issuance.
- The stock must be acquired at original issuance — for example, directly from the company in exchange for cash, property, or other consideration.
- The company must also be engaged in an active trade or business, with at least 80% of its assets used in business activities.
These requirements apply throughout your holding period, so ongoing compliance matters. Corporations are not required to certify QSBS eligibility with the IRS, which means the burden of documentation falls on you and your tax advisor.
QSBS stacking: Multiplying the exclusion
If your anticipated gain exceeds the $15 million per-issuer cap, QSBS stacking may multiply the exclusion. By gifting shares to spouses and multiple non-grantor trusts, called stacking trusts, you can potentially shelter significantly more gain.
For Section 1202 purposes, a non-grantor trust is treated as a separate taxpayer from the person who created it. Depending on how the trust is structured and whether it distributes or retains income, income taxes may be paid by the trust, its beneficiaries, or both.
For Example
The IRS has an antiabuse rule under Section 643(f) that can collapse multiple trusts into a single taxpayer if they share substantially the same beneficiaries and lack independent nontax reasons for their creation. Proper structuring with distinct beneficiaries and independent purposes is essential.
State tax considerations
Even with robust federal planning, state-level taxes can affect your overall outcome. California, Pennsylvania, Mississippi, and Alabama do not conform to the federal QSBS exclusion. California, with its top rate of 13.3%, treats the full gain as taxable — even the portion excluded federally.2
The nine no-income-tax states considered “effectively conforming” for QSBS purposes — Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington State and Wyoming — impose no personal income or capital gains tax at the state level on QSBS gains.
Other states, including New Jersey, Massachusetts, Illinois, Oregon, Hawaii, and Minnesota, offer partial conformity.
For founders in partially or nonconforming states, establishing non-grantor trusts in favorable jurisdictions can help manage state tax exposure.
The primary key in determining any state-level taxes is the residency of the shareholder at the time of the sale. Also important is understanding the secondary key of “state nexus” of company operations, which can bring some level of state tax apportionment and taxes to the transaction. State nexus is the legal connection between a business and a U.S. state that gives the state authority to impose tax obligations.
Coordinating pre- and postlaw holdings
If you acquired QSBS on or before July 4, 2025, the prior rules still apply: The $10 million exclusion cap and $50 million gross-asset threshold remain in effect for that stock. If your company issues new stock after July 4, 2025, the new $15 million cap and $75 million threshold apply to those shares.
For companies that previously reached the $50 million gross-asset limit, the new $75 million threshold creates an opportunity to issue additional QSBS starting July 5, 2025, until the company reaches $75 million in aggregate gross assets. This means some companies that had previously exhausted their QSBS issuance capacity can now issue new qualifying shares.
Integrated planning strategies
To make the most of the expanded QSBS benefits, consider these coordinated strategies that help bring together multiple areas of your financial picture.
Tax planning
Consult with a tax professional to map your holding period against your liquidity timeline. The tiered exclusion structure creates new flexibility. A three-year hold with a 50% exclusion may make sense if market conditions or business needs favor an earlier exit, while a five-year hold can maximize the federal benefit. You can get help modeling the after-tax outcome of each scenario.
Estate planning
You can combine QSBS stacking through non-grantor trusts with broader estate planning goals. Gifting shares before a liquidity event, when valuations are lower, may reduce gift tax implications while multiplying the exclusion across family. This approach can help align your wealth transfer strategy with your tax efficiency goals.
Investment management
Coordinate your exit strategy with your overall portfolio. If a significant portion of your wealth is concentrated in one company’s stock, the QSBS exclusion can help manage the tax cost of portfolio diversification — but timing matters. A coordinated approach to selling and reinvesting can help you maintain a balanced portfolio.
Financial planning
Preliquidity planning should begin well before a sale or initial public offering (IPO). Documenting QSBS eligibility, tracking holding periods, and structuring trusts early can help you avoid complications when the liquidity event arrives. A comprehensive approach can help tie your tax, estate, and investment decisions together, so every part of your financial picture supports your goals.
Looking ahead
The Treasury Department and IRS are developing regulations to implement the QSBS changes made in the OBBBA, with Section 1202 listed on the 2025-2026 Priority Guidance Plan.3 Proposed rules could clarify implementation details, particularly around the interaction between old and new rules for companies with mixed stock issuance dates.
For now, the expanded QSBS benefits aims to create meaningful opportunities for founders and investors. Coordinating your financial planning, tax planning and preparation, estate planning, and investment management strategies can help you capture those benefits while aligning your financial decisions with your broader goals.
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FAQs
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Qualified small business stock (QSBS) refers to shares in a qualifying domestic C corporation acquired at original issuance. Under Section 1202, eligible shareholders can exclude a portion of capital gains from federal income tax when they sell the stock if they meet holding period and other requirements. After the One Big Beautiful Bill Act (OBBBA) of 2025, the exclusion cap increased to $15 million per issuer, with a tiered structure based on how long you hold the stock.
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For qualified small business stock (QSBS) acquired after July 4, 2025, the OBBBA introduced a tiered exclusion: 50% after three years, 75% after four years, and 100% after five years. The nonexcluded portion at the three- and four-year tiers is taxed at 28% plus the 3.8% net investment income tax. The full 100% exclusion still requires a five-year hold.
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Whether you should hold or sell your qualified small business stock (QSBS) depends on your specific situation. The full five-year hold maximizes the federal exclusion, but the new three- and four-year partial exclusions create flexibility if liquidity needs or market conditions favor an earlier exit. A Mercer Advisors tax professional can help you weigh the after-tax outcome of each scenario, considering the 28% rate on nonexcluded gain at the shorter holding periods.
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Yes. You should establish qualified small business stock (QSBS) stacking through non-grantor trusts before a liquidity event is on the horizon, when the stock’s value is lower. This helps reduce gift tax implications and allows each trust to qualify as a separate taxpayer for the $15 million exclusion. Early planning with a Mercer Advisors estate planning specialist can help ensure proper structuring.
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Mercer Advisors has tax and estate planning specialists who can help you navigate qualified small business stock (QSBS) strategies. Our unified team can help coordinate your tax, estate, and investment planning with a comprehensive solution that integrates these disciplines, so every part of your financial picture works together.
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Qualified small business stock (QSBS) eligibility depends on multiple factors: The company must be a domestic C corporation with gross assets under $75 million at the time the stock is issued, and the stock must be held for at least three years for a partial exclusion or five years for the full exclusion. A Mercer Advisors tax professional or wealth advisor can review your cap table, stock purchase dates, and company financials to confirm whether your shares qualify under Section 1202.
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Pre-One Big Beautiful Bill Act (OBBBA) rules required a five-year hold for the full exclusion, with a $10 million per-issuer cap and $50 million gross-asset threshold. Post-OBBBA rules introduce a tiered holding period (50% at three years, 75% at four, 100% at five), a $15 million exclusion cap, and a $75 million gross-asset threshold — all for stock acquired after July 4, 2025. Stock acquired on or before that date remains under the earlier rules.
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Holding qualified small business stock (QSBS) individually limits you to one $15 million exclusion per issuer. QSBS stacking multiplies the exclusion by gifting shares to multiple non-grantor trusts, each qualifying as a separate taxpayer. For a founder with $60 million in gain, stacking could shelter the full amount across four taxpayers, versus only $15 million individually. However, stacking requires proper trust structure, distinct beneficiaries, and early planning to help avoid IRS antiabuse scrutiny.
1“QSBS Benefits Expanded Under One Big Beautiful Bill Act.” The National Law Review, July 10, 2025.
2“Summary of Federal Income Tax Changes.” State of California Franchise Tax Board, Oct. 6, 2026.
3“2025-2026 Priority Guidance Plan.” Department of the Treasury, Sept. 30, 2025.
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