QSBS under OBBBA: the 50%/75%/100% exclusion tiers, with a worked example

For nearly 15 years, Section 1202's rule for Qualified Small Business Stock (QSBS) was a single cliff: hold it five years, exclude 100% of the gain; sell one day earlier, and none of that exclusion applied at all. The One Big Beautiful Bill Act (OBBBA), enacted July 4, 2025, replaced that cliff with three steps — 50% at three years, 75% at four years, 100% at five — for stock acquired after the enactment date. Most coverage of the change states the new percentages and stops there. This page runs one investor's numbers through all three tiers, shows why the 75%-excluded gain isn't taxed the same way an ordinary capital gain would be, and works through the separate per-issuer cap that limits how much gain any one holding can ever shelter.

What OBBBA changed, side by side

The tiered schedule only applies to stock acquired after July 4, 2025. Stock acquired on or before that date keeps following the old rules for its entire life — there's no way to convert existing QSBS into the new regime by exchanging it or rolling it into a new holding; the acquisition date that started the clock is what governs.

The gross assets test is checked once, at issuance: the corporation's aggregate gross assets (measured at tax basis, not fair market value) must not have exceeded the threshold at any time before, and immediately after, the stock was issued. It doesn't matter how large the company grows afterward.

Worked example: the same gain, three different exit dates

An engineer joins a qualifying startup and is issued QSBS on August 15, 2025 — after the OBBBA cutoff, so the new tiered schedule applies. Her basis in the stock is $250,000. Suppose she sells for a $3,000,000 gain, and compare three possible sale dates:

The $3,000,000 gain is well under her per-issuer cap (10× her $250,000 basis is $2,500,000, which is less than the $15,000,000 floor, so her cap is $15,000,000) — the cap doesn't bind in this example, but it will in the next one.

The trap in the "includible" portion: it isn't taxed at ordinary capital gains rates

Most summaries of the tiered schedule leave out what happens to the gain that isn't excluded. Under IRC Section 1(h), the non-excluded portion of QSBS gain that's eligible for the Section 1202 exclusion — but not excluded because the holding period only reached the 50% or 75% tier — is taxed at a flat 28% rate, not the usual 15%/20% long-term capital gains rates (23.8% and 31.8% respectively with the 3.8% net investment income tax added). That rate predates OBBBA; it applied to older QSBS's 50%/75% tiers too. It just now applies far more often, because OBBBA created two new tiers where it can bite.

Applying that to the example above: at the 3-year exit, the $1,500,000 includible gain is taxed at 28% — $420,000 of federal tax — rather than at the 20% top ordinary long-term rate ($300,000) an investor might assume applies to a "capital gain." At the 4-year exit, the $750,000 includible gain costs $210,000 at 28%, versus $150,000 at a flat 20% assumption. Only the 5-year, 100%-excluded exit avoids the 28% rate entirely, because there's no includible gain left for it to apply to.

Worked example: when the per-issuer cap actually binds

The cap is the greater of $15,000,000 or 10× the investor's basis — so it only exceeds $15,000,000 for investors with more than $1,500,000 of basis in the stock. Suppose a second investor put in $2,000,000 for her QSBS (basis $2,000,000, also acquired after July 4, 2025) and, after holding more than five years, sells for a $22,000,000 gain.

• 10× basis = $20,000,000, which is greater than the $15,000,000 floor, so her per-issuer cap is $20,000,000.
• She's held the stock past the 5-year mark, so the 100% exclusion tier applies — but only up to the cap.
• $20,000,000 of her $22,000,000 gain is excluded. The remaining $2,000,000 exceeds the cap entirely and never enters the Section 1202 calculation at all — it's taxed as an ordinary long-term capital gain at standard rates, not at the 28% rate discussed above, since that special rate only applies to gain that's eligible for the exclusion computation in the first place.

A founder or early employee with a large basis (a priced seed round, or stock exercised early at a low valuation) can end up with a cap well above $15,000,000 — it pays to compute 10× basis explicitly rather than assuming the flat figure is the ceiling.

Quick reference

All of this sits on top of the baseline Section 1202 eligibility rules that OBBBA didn't touch: the stock must be issued by a domestic C corporation, acquired at original issuance (not on the secondary market), and the company must be an active "qualified trade or business" — a list that still excludes most professional services, banking, farming, hotels, and restaurants.

Test yourself on this and the rest of the One Big Beautiful Bill Act's corporate and business tax changes with PassDrill's US corporate & business tax practice questions.

This page is educational material to help you understand and practice how the Section 1202 exclusion is calculated; it is not professional tax or legal advice. QSBS eligibility involves fact-specific tests (active business requirements, redemption rules, and more) not covered here — consult a qualified tax professional before relying on this for an actual transaction.

Source: 26 U.S.C. §1202, as amended by the One Big Beautiful Bill Act, Pub. L. 119-21 (2025), via law.cornell.edu/uscode/text/26/1202; 26 U.S.C. §1(h) on the 28% rate for includible Section 1202 gain; The Tax Adviser (AICPA), "QSBS gets a makeover: What tax pros need to know about Sec. 1202's new look" (Nov. 2025) and Baker Tilly, "Changes to section 1202, Qualified Small Business Stock, in the One Big Beautiful Bill Act," for confirmation that the new 50%/75% tiers carry no AMT preference.

Drill US Corporate & Business Tax practice questions →