How The New QSBS Rules Affect Founders And Investors

Forbes

a day ago

Peyton Carr is a Personal Financial Advisor for pre- and post-exit founders, entrepreneurs, and UHNW families | Keystone Global Partners.
On July 4, 2025, the One Big Beautiful Bill Act (OBBBA) ushered in a new era for qualified small business stock (QSBS), introducing the most significant tax changes to this framework in 15 years. For founders and investors, these updates, which include shorter holding periods, increased exclusion limits and broader eligibility criteria, offer exciting opportunities to optimize tax savings and liquidity strategies.
Below, I will break down these changes and provide planning considerations to illustrate how founders and investors can effectively use the new rules.
Overview Of The New QSBS Rules
QSBS has long been a powerful tool for startup founders and early investors. Under the previous rules, holding QSBS for at least five years allowed for up to $10 million in federal capital gains tax to be excluded, or 10 times the investment basis, whichever was higher. However, the five-year holding period acted as an "all-or-nothing" barrier. Selling just one day too early meant losing all QSBS benefits.
The OBBBA has modernized QSBS in critical ways, making it more flexible and attractive. Here's an overview of the primary changes:
Now, QSBS offers partial tax relief sooner:
• 50% exclusion after three years (15.9% effective federal tax rate)
• 75% exclusion after four years (7.95% effective federal tax rate)
• 100% exclusion after five years (0% federal tax rate, as before)
This tiered approach removes the prior rules' rigidity, which enables earlier exits without forfeiting all tax benefits for QSBS acquired after July 4, 2025.
The lifetime cap has increased from $10 million to $15 million per taxpayer, per company. Beginning in 2027, this limit will also adjust for inflation, adding even more value over time.
The gross asset threshold for companies to qualify as a 'small business' has risen from $50 million to $75 million, allowing more startups, especially larger or capital-intensive ones, to qualify and issue QSBS to investors. This will also adjust for inflation starting in 2027.
QSBS issued before July 4, 2025, remains under the old rules, while the new benefits apply to stock issued on or after this date. Managing pre- and post-OBBBA QSBS under these parallel systems will be crucial. For instance, you could have QSBS under the old rules for your Series A, and QSBS under the new rules for your Series B.
Planning Considerations For Founders And Investors
The new QSBS rules bring valuable opportunities, but they also require strategic planning. Here are some key considerations:
The new three- and four-year exclusions provide more flexibility for investors who need early liquidity. Founders considering secondary sales or tender offers now have practical options to de-risk sooner. However, if possible, aim for the full five-year hold to optimize tax benefits. For example, if a founder sells QSBS stock valued at $15 million after three years, previous QSBS rules would have resulted in about $3.57 million in federal capital gains taxes using the 23.8% long-term capital gains rate. With the new system, the 50% exclusion reduces the taxable amount, resulting in an approximate 15.9% effective tax rate and a significant drop in federal taxes to roughly $2.39 million. If held for four years at roughly a 7.95% tax rate, the federal tax due would be approximately $1.19 million.
The increased $15 million QSBS cap provides founders with large exits a valuable opportunity to minimize more taxes. Founders can consider strategies such as "QSBS stacking," where shares are gifted to family members or trusts to maximize the QSBS exclusions.
Consider an investor with $60 million in anticipated QSBS exit value. If the investor keeps $15 million and gifts $15 million to three separate non-grantor trusts (one for each of their three children), the entire $60 million could potentially be excluded from federal taxes upon exit, provided the five-year holding period is met. If the shares are held for only four years, 75% of the $60 million would be excluded. At three years, 50% would be exempt.
The $75 million gross asset threshold allows more startups to raise larger or later-stage rounds that might qualify for QSBS. However, it's important to carefully track compliance with the QSBS requirements during and after fundraising. For instance, a Series B round might qualify for QSBS under the new rules, whereas it might not have under the old rules.
Option holders who exercise after July 4, 2025, will benefit from the new rules. Under these changes, the exercise date starts the holding period for tiered exclusions, creating value even on shorter timelines, such as three or four years before an exit. For startup founders who hold both stock and options, like many of our clients at Keystone Global Partners, this presents a significant opportunity to exercise and take advantage of QSBS tax benefits in just three years, when previously they may have thought the capital outlay and holding period of five years was not realistic.
Advanced planning is essential to fully unlock QSBS benefits. Whether it's using gifting strategies, exploring Section 1045 rollovers for deferrals or aligning exit dates with key holding-period milestones, founders and investors should work closely with experienced tax and legal professionals.
Final Thoughts
I believe the 2025 QSBS tax changes will profoundly impact how founders and investors manage liquidity, plan exits and preserve wealth. By offering tiered exclusions, expanded caps and broader company eligibility, these rules encourage startup innovation while delivering significant tax savings. For founders, integrating these strategies into exit planning will help maximize their financial outcomes.
The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
Forbes Finance Council is an invitation-only organization for executives in successful accounting, financial planning and wealth management firms. Do I qualify?