For founders, early employees, and investors in C-corporations, one of the most powerful provisions in the entire tax code has long been Section 1202 — the Qualified Small Business Stock (QSBS) exclusion, which can make millions of dollars of gain on the sale of company stock entirely free of federal tax. It’s also one of the most technical, with a thicket of requirements that have to be satisfied not just at sale but stretching back to the day the stock was issued.
The One Big Beautiful Bill Act (OBBBA), signed July 4, 2025, gave QSBS its most significant expansion since the rules were last overhauled in 2010. For stock acquired after that date, the holding period to claim an exclusion dropped, the dollar cap rose, and the size of company that can issue qualifying stock grew. But — and this is the part that creates the most confusion — the old rules didn’t disappear. They still govern any stock acquired on or before July 4, 2025. So the single most important question in QSBS planning for 2026 is now a date: when was the stock acquired?
This is a topic that comes up constantly with the business owners and founders we work with across Texas — in Austin’s tech corridor, in San Antonio, and among the many Texas entrepreneurs weighing how to structure a company they may someday sell. The QSBS exclusion can be worth more than almost any other planning move available to a founder, and OBBBA made it meaningfully more accessible. Here’s how it actually works in 2026.
What QSBS Is, in Plain Terms
Section 1202 lets a non-corporate taxpayer — an individual, a trust, a partnership passing through to individuals — exclude from federal income tax some or all of the gain on the sale of qualifying C-corporation stock. When the stars align, that means selling stock at a multi-million-dollar gain and owing zero federal capital gains tax on it.
The catch is that “qualifying” carries a long list of conditions. The stock has to be:
- Original-issue C-corporation stock. It must be acquired directly from the corporation (at original issuance) in exchange for money, property, or services — not purchased from another shareholder. The company must be a domestic C-corporation, both when the stock is issued and substantially throughout the holding period.
- Issued by a company under the gross-assets ceiling. The corporation’s aggregate gross assets cannot have exceeded a threshold immediately before and right after the stock was issued.
- Engaged in a qualified business. The corporation must use at least 80% of its assets in an active qualified trade or business — which excludes certain service fields (health, law, accounting, consulting, financial services, and similar), along with banking, farming, mining, and hospitality.
- Held for the required period before sale.
Those last two — the asset ceiling and the holding period — are exactly what OBBBA changed.
What OBBBA Changed (For Stock Acquired After July 4, 2025)
OBBBA’s QSBS provisions live in Section 70431 of the law, and they apply only to stock acquired after July 4, 2025. Three things changed.
1. A Tiered Holding Period Replaces the Flat Five-Year Rule
Under the old rules, QSBS was binary: hold for more than five years and exclude 100% of eligible gain; sell even a day earlier and exclude nothing. OBBBA replaced that cliff with a graduated schedule:
| Holding period | Gain excluded |
|---|---|
| Less than 3 years | 0% |
| 3 years | 50% |
| 4 years | 75% |
| 5+ years | 100% |
This is a substantial shift. A founder who exits at year three or four — far more common than holding a full five years — now gets a partial exclusion that simply didn’t exist before. The full 100% exclusion still requires five years, but the all-or-nothing penalty for an earlier sale is gone.
2. The Exclusion Cap Rose to $15 Million (or 10× Basis)
The old per-issuer cap on excludable gain was the greater of $10 million or 10 times the taxpayer’s adjusted basis in the stock. OBBBA raised the dollar figure to $15 million, and it’s now indexed for inflation going forward. The “10× basis” alternative remains — so a taxpayer who put significant capital into the stock can potentially exclude well beyond $15 million if ten times their basis is the larger number.
3. The Gross-Assets Ceiling Rose to $75 Million
To issue QSBS, a corporation’s aggregate gross assets must stay under a ceiling. OBBBA raised that threshold from $50 million to $75 million, measured immediately before and after the stock issuance. The practical effect is that larger, more mature companies can now issue qualifying stock — expanding the universe of businesses whose founders and investors can benefit.
The Catch on Non-Excluded Gain
Any gain that isn’t excluded — the 50% that’s still taxable on a three-year hold, for example — is taxed at a 28% rate rather than the standard long-term capital gains rate. So the tiered exclusion isn’t quite as generous as it first appears on the partial tiers: at three years, you exclude half and pay 28% on the other half.
The Old Rules Still Apply to Older Stock
Here’s the part that trips people up. Stock acquired on or before July 4, 2025 keeps the old rules entirely. Side by side, the two regimes look like this:
| Rule | Acquired on or before July 4, 2025 | Acquired after July 4, 2025 (OBBBA) |
|---|---|---|
| Holding period | Flat 5 years for any exclusion (100% at 5 years; nothing earlier) | Tiered: 50% at 3 years, 75% at 4 years, 100% at 5+ years |
| Exclusion cap (per issuer) | Greater of $10M or 10× basis | Greater of $15M (inflation-indexed) or 10× basis |
| Gross-assets ceiling at issuance | $50 million | $75 million |
So in 2026 and for years to come, a founder may hold two batches of stock in the same company — some issued before July 5, 2025 under the old regime, some after under the new one — each governed by a different set of rules. The acquisition date isn’t a footnote; it’s the first thing to establish before any QSBS analysis.
One mechanical note that matters here: for stock that would otherwise straddle the date, the law looks to the first day the taxpayer actually held it (after applying the normal holding-period rules) to determine which regime applies. This is exactly the kind of detail worth confirming with a tax professional before relying on it.
A Simple Illustration
Suppose a founder receives original-issue stock in a qualifying C-corporation in 2026, with a very low basis, and the company’s gross assets are well under $75 million at issuance.
- If the founder sells after 3 years at a $10 million gain, 50% — $5 million — is excluded from federal tax. The other $5 million is taxed at 28%.
- If the founder holds for 4 years, 75% of the gain is excluded.
- If the founder holds 5+ years, the entire $10 million is excluded (well within the $15 million cap), and the federal tax on the sale is zero.
Under the old rules, that same founder selling at year three or four would have excluded nothing — the entire gain would have been taxable. The tiered schedule is what makes an earlier, partial exit meaningfully better than it used to be.
(This is illustrative and simplified; an actual QSBS analysis depends on satisfying every requirement across the full holding period, the taxpayer’s basis, and the company’s facts.)
Why This Reshapes the C-Corp Question
For years, the conventional wisdom for small businesses leaned toward pass-through structures — S-corporations and LLCs — in part because of the QBI deduction and the avoidance of C-corporation double taxation. QSBS is the major counterweight, and OBBBA strengthened it considerably.
Only a C-corporation can issue QSBS. So for a founder building a company they may sell at a significant gain — particularly a capital-intensive or high-growth business expecting to exceed the income levels where pass-through benefits shine — the expanded QSBS exclusion can tilt the entity-choice analysis toward a C-corporation in a way it didn’t before. The shorter partial-exclusion holding periods and the higher asset ceiling both widen the set of companies for which this math works.
That said, this is genuinely a modeling exercise, not a rule of thumb. A C-corporation carries double taxation on distributed earnings and its own administrative weight, and QSBS qualification has to be established and preserved over years — a single misstep on the asset ceiling, the active-business test, or a stock redemption can taint it. The QSBS exclusion is a reason to consider a C-corporation, not an automatic answer. We walk through the broader entity decision in our guide on choosing between an S-Corp and an LLC, and the pass-through side of OBBBA in our piece on the QBI deduction for Texas business owners.
Planning Levers Worth Knowing
QSBS rewards planning that starts early — ideally at or before the moment stock is issued. A few of the levers that come up most often, offered as education rather than advice:
Establishing QSBS status at issuance. Because qualification depends on facts at the moment of issuance (the gross-assets ceiling, original issuance, C-corporation status), the time to confirm eligibility is when the stock is issued — not years later when a sale is on the table. Documentation created at issuance is far more persuasive than reconstruction after the fact.
“Stacking” across taxpayers. The exclusion cap is per taxpayer, per issuer. Gifting QSBS to other family members or to non-grantor trusts — each of which has its own cap — can multiply the total gain excluded across a family. (Notably, the project-level rules treat the $15 million limit as applying among related parties, while non-grantor trusts may access the 10×-basis exclusion separately; the interaction is technical and worth professional modeling.)
Watching redemptions. Certain stock redemptions by the corporation, around the time of issuance, can disqualify stock from QSBS treatment. Founders contemplating buybacks need to be mindful of the timing rules.
Coordinating the sale year. Because non-excluded gain is taxed at 28% and a large QSBS sale can ripple into other parts of the return — the Net Investment Income Tax, IRMAA Medicare surcharges two years later, and more — the year of a major exit is exactly when coordinated planning earns its keep.
Common Questions
What is the QSBS holding period under OBBBA? For stock acquired after July 4, 2025, the exclusion is tiered: 50% of gain excluded at a three-year hold, 75% at four years, and 100% at five or more years. Stock acquired on or before July 4, 2025 keeps the old flat rule — a full five-year hold for any exclusion, and 100% exclusion at five years.
How much gain can QSBS exclude in 2026? For stock acquired after July 4, 2025, the per-issuer cap is the greater of $15 million (indexed for inflation) or 10 times the taxpayer’s adjusted basis. For older stock, the cap is the greater of $10 million or 10× basis.
Does my company qualify to issue QSBS? The corporation must be a domestic C-corporation with aggregate gross assets under $75 million (for post-July 4, 2025 stock; $50 million for older stock) at issuance, and it must use at least 80% of its assets in an active qualified business. Certain service businesses — health, law, accounting, consulting, financial services, and others — along with banking, farming, mining, and hospitality, are excluded.
Is gain that isn’t excluded taxed normally? No. Gain that exceeds the exclusion cap or isn’t fully excluded (such as the taxable half on a three-year hold) is taxed at a 28% rate, rather than the standard long-term capital gains rate.
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