One Big Beautiful Bill Expands Qualified Small Business Stock Exemptions

President Trump signed into law the One Big Beautiful Bill Act (the “Act”) on July 4, 2025 (the “Signing Date”). Among the Act’s significant tax extensions and changes to tax law are several taxpayer-favorable revisions to the “Qualified Small Business Stock” (QSBS) rules of Section 1202 of the Internal Revenue Code. The Act left unchanged the ability of taxpayers to exclude up to 100% of the gain from a sale of QSBS that has been held for at least five years and introduced new partial exemption rules for shorter holding periods and higher, inflation-adjusted dollar limitations.

New Holding Period Rules

While the five-year holding period remains in place for the 100% gain exclusion, the Act provides for a partial gain exemption for QSBS acquired after the Signing Date and sold after only three years.

For sales of QSBS after three years, eligible taxpayers are entitled to a 50% gain exclusion. The remaining 50% of the gain will be taxed at a rate of 28% (plus the 3.8% Medicare tax). As a result, an overall effective tax rate of 15.9% would apply to the gain.

For sales of QSBS after four years, eligible taxpayers are entitled to a 75% gain exclusion (with the remainder taxed at the 28% + 3.8% rate described above), for an overall effective tax rate of 7.95% on the gain.

Increased Taxpayer Exemption

Prior to the Act, eligible taxpayers were entitled to a QSBS exclusion for each qualified small business equal to the greater of (1) $10 million in the aggregate for current or prior tax years or (2) 10 times the taxpayer’s adjusted basis in the QSBS disposed of in the current year. For QSBS acquired after the Signing Date, the $10 million amount is increased to $15 million and will be indexed to inflation going forward.

Increased Aggregate Gross Assets Limitation

Under prior law, only corporations whose aggregate gross assets had never exceeded $50 million could issue QSBS. For issuances after the Signing Date, the $50 million threshold is now $75 million and will be indexed for inflation going forward.

Additional Considerations

Issuances of stock prior to or on the Signing Date continue to be subject to the previous holding period requirement, exemption amount limitation, and aggregate gross asset threshold. In addition, stock received in a tax-free transaction after the Signing Date in exchange for QSBS issued prior to or on the Signing Date will be subject to the pre-Act rules and limitations.

The Act provides a taxpayer-friendly refresh of the QSBS rules by increasing threshold amounts to help offset the impact of inflation since the rules were originally enacted and to relax the holding period requirements. Please contact any of the authors or your usual MoFo point of contact with questions about this client alert.