Do you own stock in a high-growth small business? Or are you a founder, investor, or employee of one? If so, you should know about major tax changes in the One Big Beautiful Bill Act (OBBBA) that expand the benefits of qualified small business stock (QSBS).
What QSBS Is
“QSBS” refers to stock issued by regular C corporations. When both the corporation and shareholder meet IRS requirements, the owner of QSBS can exclude most—or even all—of their gains from federal tax when they sell the stock. For successful investments, this can mean tax-free profits worth tens of millions of dollars.
Which Companies Qualify
Not every business is eligible to issue QSBS. The law excludes:
- Finance and insurance companies
- Farming businesses
- Professional services such as law, accounting, and consulting
- Hospitality businesses
Additionally, QSBS was historically limited to companies with total assets of no more than $50 million at the time of issuance. The OBBBA raises this cap to $75 million, opening the door for more companies to issue QSBS.
New Holding Period Rules
To benefit from the QSBS exclusion, investors must meet a minimum holding period:
- Five years: Still required to qualify for the full 100% exclusion.
- Three or four years: Under the OBBBA, partial exclusions are now available for stock sold before the five-year mark.
This added flexibility makes QSBS more appealing for investors who may not want to wait a full five years.
Higher Exclusion Limits
Before the OBBBA, the exclusion limit was the greater of:
- $10 million, or
- 10 times your basis in the stock.
The OBBBA raises the dollar limit to $15 million, while keeping the 10-times-basis rule. This enhancement means even larger potential tax-free gains for successful investors.
Effective Date
These changes apply to QSBS issued on or after July 5. Taken together, they represent the biggest upgrade to QSBS in more than a decade—giving founders, employees, and investors an unprecedented opportunity to build wealth tax-free.
Example
Suppose you invest $100,000 in QSBS shares in 2026 and sell them in 2031 for $1.1 million. Because you held the stock for five years, your $1 million gain is excluded from federal tax. That means you avoid both the 20% long-term capital gains tax and the 3.8% net investment income tax—a savings of $238,000.
