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QSBS Planning Under the OBBBA
The QSBS (Qualified Small Business Stock) exclusion offers one of the most significant capital gains tax planning opportunities for founders, investors and employees in high-growth startups. The One Big Beautiful Bill Act (OBBBA) that was signed into law on July 4, 2025, expanded aspects of Section 1202 of the Internal Revenue Code, which provides tax benefits to holders of QSBS.
Section 1202 of the Internal Revenue Code was enacted via the 1993 Revenue Reconciliation Act (RRA) to incentivize individuals to invest in certain small businesses, at the time allowing for an exclusion of up to 50% of the capital gains associated with the sale of stock of those businesses from an owner’s federal taxes.
In 2010, the Small Business Jobs Act (SBJA) increased the exclusion available to taxpayers from 50% to 100%, meaning each taxpayer would be able to exclude up to $10 million of capital gains on the sale of qualifying stock acquired after September 27, 2010 (the date the bill was signed into law), provided certain conditions were met.
Under the SBJA, a “qualified small business” was defined as a domestic C corporation whose aggregate gross assets did not exceed $50,000,000 prior to issuance or immediately after issuance of the stock. The business also had to be an active business and operate within a particular sector. Section 1202 enumerates the proscribed industries, including trades or businesses involved in personal services (health, law, engineering, architecture, accounting, performing arts, actuarial sciences, financial or brokerage services, performing arts, consulting, athletics); banking, insurance, finance, or leasing; farming and mining; and hospitality services.
The final requirement under the SBJA was the stock had to be held by the shareholder for a period of five years before the shareholder could sell the stock. The inception of this period depended on how the stock was acquired.
OBBBA made some significant changes to Section 1202, creating additional planning opportunities for QSBS shareholders:
- The holding period requirement, which was previously set at five years, has been changed to a tiered structure. For any qualified small business stock acquired on or after July 5, 2025, a shareholder can sell the qualified stock after holding it for three years and obtain a 50% exclusion on the federal capital gains tax on the sale. After holding the stock for four years, a shareholder can exclude up to 75% of the capital gains incurred on the sale. The full 100% exclusion still applies for any stock held for more than five years.
- Another significant change involves the amount available to shareholders for exclusion - the $10 million capital gains tax exclusion has been increased to $15 million for any stock acquired after July 5, 2025, subject to inflation adjustments beginning in 2027.
- OBBBA changed the definition of a “qualified small business” which will substantially increase the number of businesses that meet the threshold requirements. It also increased the “gross asset” value limit from $50 million prior to or immediately after issuance of such qualified stock to $75 million for any stock acquired after July 5, 2025, also subject to inflation adjustments beginning in 2027, provided the value of such stock did not exceed $75 million at any time on or after the enactment of the RRA.
These changes are creating more opportunities for investors for significant federal tax savings. Please contact your Ingalls advisor to discuss this and other planning opportunities.
The material is not to be reproduced or distributed to others without Ingalls & Snyder, LLC’s (“Ingalls” or the “Firm”) express written consent. This material is being provided for informational purposes and any opinions expressed in this material are only opinions at the time of writing. Nothing provided by Ingalls should be considered tax or legal advice, and clients should seek advice from their tax and legal professionals. Bridgehampton is a team at Ingalls & Snyder, LLC, an investment advisor registered with the Securities & Exchange Commission and a FINRA member broker dealer. More information including the firm’s Form ADV Brochure and Form CRS can be found at https://www.ingalls.net/importantinformation
The content provided herein is for informational purposes only. The statements are believed to be accurate at the time of writing, but tax laws may change. The statements provided do not contemplate each individuals unique financial circumstances. Therefore, you should consult a professional legal and tax advisor for your estate planning needs before taking action.
Ingalls & Snyder is a registered investment advisor and broker-dealer based in New York City. We provide investment management and related services to private clients and institutional investors.
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