This article on 2025 QSBS tax changes was originally published by Citywire Americas

Alexandra Valentín of Tiempo Capital explores how recent legislative updates to QSBS rules offer expanded tax advantages for startup founders and early-stage investors.

In this month’s expert contribution from Tiempo Capital, Alexandra Valentín, explores how recent changes to the Qualified Small Business Stock (QSBS) tax provision create new opportunities for startup founders and early-stage investors. With over 20 years of experience advising Act 60 individuals and business owners, Valentin outlines how updates like shorter holding periods, higher tax-free gain limits, and expanded eligibility can significantly impact long-term wealth planning.

For startup founders and early-stage investors, navigating tax considerations can significantly impact long-term wealth. One powerful yet often underutilized tax provision is Qualified Small Business Stock (QSBS). Historically, QSBS has allowed investors to avoid federal taxes on substantial capital gains—but recent legislative changes have expanded these benefits considerably.

The passage of the One Big Beautiful Bill Act (OBBBA) introduces valuable enhancements, including shorter holding periods for partial tax relief, increased lifetime exclusion limits, and broader eligibility criteria for QSBS eligibility. This article analyzes the most important 2025 QSBS tax changes implemented by the OBBBA, though there are additional minor changes not addressed here.

Key QSBS Tax Advantages for Startup Founders and Investors

Qualified Small Business Stock provides significant tax benefits to qualifying investors and founders:

100% Capital Gains Tax Exclusion (Pre-BBB):

The most compelling benefit under the original QSBS rules was the ability to exclude 100% of capital gains from federal taxes on the sale of shares held for at least five years. For example, if a founder sold stock for a $10 million gain, none of this amount would be subject to the 20% federal capital gains tax or the 3.8% net investment income tax. In this scenario alone, the savings would amount to roughly $2.38 million per $10 million in gains.

Generous Limits on Gains (Pre-BBB):

Before the recent changes, each qualifying investor could exclude gains of up to $10 million per issuing company—or ten times their original investment, whichever was greater. Because this QSBS gain limit applied separately to each qualifying business, investors who achieved success with multiple startups could benefit repeatedly. Sophisticated investors often amplified these tax advantages through strategic QSBS planning, allocating shares among family members or trusts, each of whom qualified independently for their own $10 million exemption.

Tailored to Startups (Pre-BBB Thresholds):

QSBS has long targeted startups and small companies by requiring the issuing corporation’s assets to be $50 million or less at issuance (under the original rules). This encouraged investments in early-stage, growth-oriented ventures. Founders could leverage QSBS as a valuable tool to attract capital, offering investors the compelling potential of tax-free returns as part of a broader exit tax planning approach for high-growth startups.

Encourages Long-Term Investment (Pre-BBB Rules):

Historically, the QSBS tax exemption required a minimum five-year holding period, encouraging investors to adopt a patient, long-term approach. Founders and angel investors were thus incentivized to focus on sustainable growth and value creation rather than short-term gains. 

Zero Federal Tax and Possible State-Level Benefits:

Gains from QSBS-qualifying investments remain federally tax-free when QSBS eligibility requirements are met. Additionally, some states recognize the federal QSBS exclusion or offer their own incentives. State-level benefits vary considerably.

QSBS Enhancements Under the Big Beautiful Bill (2025)

On July 4, 2025, Congress passed the One Big Beautiful Bill Act (OBBBA), substantially enhancing QSBS benefits for stock issued on or after its enactment. This update provides additional incentives for startup founders and investors. The key QSBS expansions introduced by the new law include:

Shorter Holding Periods for Partial Tax Exclusions

The OBBBA does not require investors to hold QSBS shares for the full five years to benefit from tax exclusions. Under the new tiered approach:

• At least 3 years: Exclude 50% of gains.
• At least 4 years: Exclude 75% of gains.
• At least 5 years: Maintain the full 100% exclusion.
  
  This tiered structure significantly improves flexibility for founders and investors who encounter early liquidity opportunities, such as acquisitions or exits. Previously an “all-or-nothing” decision at five years, QSBS now provides meaningful tax relief after holding shares for just three or four years.

Increased Exclusion Limit on Tax-Free Gains

The new law raises the lifetime exclusion cap per issuing company by 50%, from $10 million to $15 million per investor. Additionally, the $15 million limit will be adjusted for inflation starting in 2027, gradually increasing the benefit’s value over time. 

The additional $5 million exclusion could translate into approximately $1.19 million in incremental tax savings (assuming top federal rates). The alternative exclusion limit (ten times the investor’s initial basis) remains unchanged.

Broader Qualifications for Larger Companies

The original QSBS rules required qualifying companies to have no more than $50 million in gross assets at stock issuance. The new law expands eligibility by increasing this asset threshold to $75 million, indexing it to inflation moving forward. As a result, larger and later-stage startups now qualify as “small businesses” under QSBS. 

Although the original $50 million cap, established in 1993, has been partially adjusted upward, the revised $75 million limit remains below its full inflation-adjusted equivalent (over $100 million).

Key Takeaways

In short, the Big Beautiful Bill enhances QSBS by allowing investors earlier tax relief (beginning at three or four years), increasing the amount of tax-free gains per company ($15 million vs. the prior $10 million), and broadening eligibility to somewhat larger businesses. 

These 2025 QSBS tax changes apply exclusively to QSBS issued after July 4, 2025 (the law’s enactment date) and cover the major changes most relevant to founders and early investors, though the legislation also includes other minor adjustments not covered here. The previous rules will continue to governs shares issued before this date.

Importantly, the enhanced benefits are not retroactive to older shares. Founders and investors seeking to capitalize on these new advantages should consider how future financing rounds and equity issuances might leverage QSBS under the revised guidelines.

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The new QSBS enhancements offer powerful opportunities for capital gains tax planning. If you’re a founder or investor preparing for a liquidity event, our advisors can help structure your equity strategy to maximize tax efficiency. For more on how we support entrepreneurs through complex financial transitions, visit the clients we serve page. Contact us today to begin.

This material is for informational purposes only and does not constitute financial, legal, tax, or investment advice. All opinions, analyses, or strategies discussed are general in nature and may not be appropriate for all individuals or situations. Readers are encouraged to consult their own advisors regarding their specific circumstances. Investments involve risk, including the potential loss of principal, and past performance is not indicative of future results.