An individual investor acquires qualified small business stock on August 1, 2025, in a corporation that meets the requirements of IRC Section 1202, including the increased $75,000,000 aggregate gross assets test that the One Big Beautiful Bill Act introduced for stock acquired after July 4, 2025. If the investor sells the stock after holding it for exactly four years, what portion of the eligible gain may be excluded from gross income?
- 75%, under the tiered exclusion schedule the One Big Beautiful Bill Act introduced, which grants a 50% exclusion at a three-year holding period, 75% at four years, and 100% at five years, for stock acquired after July 4, 2025
- 100%, because any qualified small business stock held longer than the pre-existing five-year requirement automatically qualifies for full exclusion regardless of the exact holding period
- 0%, because the new tiered exclusion schedule only benefits stock held for the full five years, with no exclusion at all available before that point
- 50%, because the One Big Beautiful Bill Act replaced the previous 100% exclusion available to five-year holders with a flat 50% rate across all holding periods
Why A? And why not the others?
Correct answer: A. 75%, under the tiered exclusion schedule the One Big Beautiful Bill Act introduced, which grants a 50% exclusion at a three-year holding period, 75% at four years, and 100% at five years, for stock acquired after July 4, 2025
For qualified small business stock acquired after July 4, 2025, the One Big Beautiful Bill Act introduced a tiered exclusion under IRC Section 1202: a 50% exclusion of eligible gain at a three-year holding period, 75% at four years, and 100% at five years or more, alongside a raised $75,000,000 aggregate gross assets test and a higher $15,000,000 per-issuer gain cap. An investor who holds the stock for exactly four years therefore excludes 75% of eligible gain, not the full amount. The option claiming 100% wrongly treats the four-year mark as already qualifying for the maximum exclusion, when the schedule specifically reserves the full 100% exclusion for stock held five years or more. The option claiming 0% wrongly assumes no exclusion is available before the five-year mark, missing the entire point of the new tiered structure, which grants meaningful partial exclusions starting at three years. The option claiming the law cut the benefit to a flat 50% has the direction of the change backwards: the new schedule preserves the 100% exclusion for five-year holders and adds more generous partial exclusions at the three- and four-year marks on top of it, rather than reducing anything.
Source: IRC Section 1202, as amended by the One Big Beautiful Bill Act, Pub. L. 119-21 (2025)