Quick Summary
The One Big Beautiful Bill passed in 2025 raised the Section 1202 gain exclusion cap from $10 million to $15 million and adjusted the holding period rules. Those two changes mean the math on your exit just shifted, and whether that shift helps you depends entirely on how your equity is structured today.
What The Bill Actually Changed
The One Big Beautiful Bill, formally enacted as part of a broader reconciliation package, raised the Section 1202 exclusion cap from $10 million to $15 million for qualifying sales after the effective date. For married founders filing separately, the per-spouse cap increased proportionally. The legislation also extended the active business requirement window, giving early-stage founders slightly more flexibility during the critical first few years of company formation.
What did not change: the five-year holding period, the original issuance requirement, the C-corp requirement at time of stock issuance, and the $50 million gross assets test at the time of stock acquisition. These are the hard gates. The bill moved one of the dollar caps. It left the structural requirements alone.
For founders who already hold qualifying stock and are past the five-year mark, this is good news. The ceiling on your exclusion got taller. For founders who are not sure whether their stock qualifies, the bill changes nothing about what you need to fix first.
The Part That Trips Founders Up
Most founders assume QSBS is binary: either you have it or you do not. That assumption is wrong. There are layers.
First, was the company a C-corp at the exact time you received your shares? S-corps and LLCs do not qualify. If your company converted from an LLC to a C-corp after you were issued equity, the shares you received during the LLC phase do not qualify, even if the company is a C-corp now.
Second, what were the company’s aggregate gross assets at the time of issuance? Not today. Not at the time of sale. At the time you received the stock. If the company had already crossed $50 million in gross assets, the clock on your QSBS eligibility may have never started.
Third, have you held the stock for more than five years? The holding period must be continuous. Certain option exercises reset the clock. If you exercised options later in the company’s life, the five-year window starts from the exercise date, not from when the options were granted.
Fourth, did you receive the stock at original issuance or in a secondary transaction? Purchased shares in a secondary market do not qualify under Section 1202, regardless of how long you hold them.
What The New Cap Means For Your Exit Math
If your shares do qualify and you are past the five-year hold, the increase from $10 million to $15 million per taxpayer matters. That is a $5 million larger block of gain that escapes federal capital gains tax entirely. At a 23.8% combined federal rate (including the net investment income tax), that is roughly $1.19 million in additional federal tax savings per qualifying taxpayer.
For married founders where each spouse holds qualifying stock directly, both caps apply. That is a combined $30 million in potential tax-free gain.
The gain above the cap is still taxable. That is where the strategy work lives, installment sales, Opportunity Zone investments, trust structures, and charitable vehicles all interact with the taxable portion above the Section 1202 cap. The bill did not eliminate that planning need. It raised the floor where that planning starts.
If You Are Not Sure Whether Your Shares Qualify
This is the most common place founders find themselves before an exit: they believe they probably have QSBS, they have never actually confirmed it, and they are now six months from a transaction. That belief is not a tax strategy.
A tax attorney reviews your cap table history, your equity agreements, your company’s corporate records at the time of issuance, and your gross asset documentation to determine whether Section 1202 applies to your specific shares. That analysis frequently surfaces issues, a conversion that reset eligibility, a secondary purchase that disqualifies certain shares, an exercise date that shortened the qualifying window.
Some of those issues can be addressed before a sale closes. Most of them cannot be addressed after. The difference between finding out at the right moment and finding out during due diligence or after closing is a number with multiple commas.
Founders approaching a sale who also want to understand the difference between a stock deal and an asset deal, and how that structural question intersects with QSBS eligibility, should review the related analysis on stock sale vs. asset sale tax outcomes. The deal structure decision can affect which portions of gain even have a chance at QSBS treatment.
What To Do Right Now
Pull your equity agreements and look at the issuance date, the type of stock, and the corporate structure at the time of issuance. That is the starting point. If any of those facts are unclear, that is information your tax attorney needs.
Second, look at your hold period. If you received stock at founding five or more years ago and it was issued by a qualifying C-corp, you are likely in the window. If you exercised options more recently, the hold period calculation is different and worth confirming.
Third, if you are more than 12 months from a liquidity event, there may still be planning options available. Exit planning frequently starts earlier than founders expect, the reasons for that are laid out in detail in the discussion of why exit planning should begin before the letter of intent arrives.
Contact Dustin for a confidential conversation about your tax strategy.
