How the Big Beautiful Bill Changed QSBS: What Investors Should Know in 2026

• Tiered holding periods now allow partial gain exclusion at 3 and 4 years, not just the full exclusion at 5 years.
• The gain exclusion cap rose from $10M to $15M per issuer, with inflation indexing starting in 2027.
• The gross-asset threshold expanded from $50M to $75M.
• The new rules apply only to stock acquired after July 4, 2025. Pre-enactment stock still follows the old rules.
• Four states (Alabama, California, Mississippi, and Pennsylvania) still do not conform to the federal QSBS exclusion.

QSBS is one of the most valuable tax benefits available to startup founders, early employees, and investors. Under Section 1202 of the tax code, eligible shareholders can exclude up to 100% of the capital gain on the sale of qualifying C corporation stock from federal tax. In practice, that can mean walking away from a multimillion-dollar exit owing the IRS little or nothing. A shareholder who realizes a $10M gain and qualifies for the full exclusion pays $0 in federal capital gains tax, instead of roughly $2.4M on an ordinary long-term gain.

To qualify:

• You must acquire the stock at original issuance
• The corporation must meet an active business test (80% of assets used in a qualified trade or business)
• And its gross assets must fall below the statutory threshold at the time of issuance.

There are also important industry exclusions. Certain service- and asset-light businesses are not eligible, including:

Health, law, engineering, architecture, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, banking, insurance, financing, leasing, investing, farming, hotels, and restaurants.

In addition, the statute excludes any business where the principal asset is the reputation or skill of its employees. In practice, this catches many service-based or consulting-adjacent companies that might otherwise assume they qualify.

Three changes define the new QSBS landscape.

1. Tiered Holding Periods

Under the old rules, holding QSBS for five years was all-or-nothing: sell at four years and 364 days, get nothing. OBBBA replaced that cliff with a tiered structure of 50% exclusion at 3 years, 75% at 4 years, and 100% at 5 years, fundamentally changing the timing calculus for liquidity events.

2. Higher Gain Exclusion Cap

The cap rose from the greater of $10M per issuer or 10x adjusted basis to the greater of $15M per issuer or 10x adjusted basis, with inflation indexing beginning after the 2026 tax year. For married taxpayers filing separately, the cap is $7.5M.

3. Expanded Gross-Asset Threshold

The asset ceiling for an issuing corporation increased from $50M to $75M (also inflation-indexed after 2026), bringing later-stage startups into eligibility that previously exceeded the limit.

The non-excluded portion of QSBS gain is taxed at a flat 28%, not the standard 15% or 20% long-term capital gains rates that apply to other stock sales. Add the 3.8% Net Investment Income Tax (NIIT), and the combined federal tax rate on the taxable portion is 31.8%. Applied to the new tiered exclusions:

• 3-year hold: 50% excluded → effective federal rate on total gain ≈ 15.9%
• 4-year hold: 75% excluded → effective federal rate ≈ 7.95%
• 5-year hold: 100% excluded → effective federal rate = 0%

Two important notes:

• AMT relief. The excluded portion at each tier is no longer treated as an AMT preference item, so the exclusion is clean of alternative minimum tax exposure.
• Section 1045 rollover remains available. If you sell before reaching your target exclusion tier, you can roll proceeds into new qualifying QSBS within 60 days to defer tax on the taxable portion.

The effective date matters.

The tiered holding periods, $15M cap, and $75M asset threshold apply only to QSBS acquired after July 4, 2025. Stock issued on or before that date still follows the old rules: 5-year minimum, $10M cap, $50M asset threshold. You cannot reset the clock by exchanging pre-enactment shares for new ones; carryover holding periods follow the transferred basis.

State nonconformity is a material risk.

California does not conform to the federal QSBS exclusion, so your gain can be fully taxable at the state level even when it’s completely excluded federally. For California residents, that state exposure, up to 13.3% on the entire gain, is the single most consequential planning variable in a QSBS sale. California isn’t alone: a handful of other states also decline to follow Section 1202 in full or in part, and a few have changed position recently (New Jersey began conforming for tax years beginning January 1, 2026). 

Inflation indexing begins after 2026.

Both the $15M cap and the $75M asset threshold will adjust for inflation starting in the 2027 tax year, increasing their real value over time.

Watch for incoming IRS guidance.

Section 1202 is on the IRS’s 2026 priority guidance plan. Some current planning techniques, particularly multi-trust exclusion stacking and spousal multiplication strategies, could be tightened or clarified by forthcoming regulations. Anyone planning a large QSBS transaction in the next 12 to 24 months should monitor for updates.

The new exclusion tiers, state conformity rules, Section 1045 rollovers, and QSBS stacking strategies interact in ways that reward deliberate planning, and the order in which you use them can meaningfully change the outcome. If you hold QSBS, your exit strategy may look meaningfully different under the new rules. 

QSBS and equity-compensation planning sit at the center of Summitry’s work with founders, executives, and investors across the Bay Area. If these changes affect you, we would welcome the chance to help.

Does the $15M cap apply per company or per taxpayer?

The cap is per taxpayer, per issuer. If you hold QSBS from multiple qualifying companies, each has its own $15M cap. For married couples, the statute explicitly provides a $7.5M cap for each spouse filing separately, but is silent on how the cap applies to joint filers. Most practitioners take the conservative position that joint filers share a single $15M cap per issuer, though others read the statute to give each spouse a separate cap on a joint return.

Can I use QSBS stacking to multiply the exclusion across family members?

Yes, with careful planning. QSBS stacking is the strategy of gifting QSBS to individuals or to non-grantor trusts to multiply the per-taxpayer exclusion, since each recipient generally gets their own $15M cap per issuer. Gifts made too close to a sale can be challenged under the assignment-of-income doctrine, so work with an advisor to structure this well before any liquidity event.

What happens if my company exceeds $75M in assets after I purchase stock?

The asset test is applied at the time of stock issuance. If the company was under $75M when your stock was issued, it qualifies as QSBS even if the company later grows beyond that threshold.

Do my stock options count toward the QSBS holding period?

No. Options themselves do not qualify as QSBS; only the shares you receive on exercise can. The five-year (or new tiered) holding period begins on the exercise date, not the grant date or vesting date. This catches many early employees who assume their clock started at hire.

Does California conform to the new federal QSBS rules?

California does not recognize the federal QSBS exclusion. Gains from QSBS sales are fully taxable under California income tax law (up to 13.3%), regardless of the federal exclusion.