Changes to section 1202, Qualified Small Business Stock, in the One Big Beautiful Bill Act

On July 4, 2025, President Trump signed the One Big Beautiful Bill Act (the Act[P.L. 119-21]) into law. The Act introduces several changes to IRC section 1202 that broaden the availability of Qualified Small Business Stock (QSBS) benefits to eligible shareholders and expand the amount of gain that can be excluded.

Background

Section 1202 permits eligible shareholders of stock in certain C corporations to potentially exclude from gross income up to 100% of their gain from the sale or exchange of QSBS. To qualify, there are certain shareholder and corporate level requirements that need to be met, including the original issuance requirement, the gross assets test and the active business test, which require careful measurement during the shareholder’s entire holding period, and, in some instances, before the stock is even acquired.

The Act

The Act makes several changes to section 1202 benefiting investors of QSBS acquired after July 4, 2025, including reduced holding period requirements, broadened eligibility thresholds and increases to the per-issuer cap on eligible gains that can be excluded from tax. Below is more detailed information.

Reduction of holding period with graduated benefits

Under prior law, for QSBS acquired on or before July 4, 2025, QSBS was required to be held for more than five years to qualify for gain exclusion. The amount of gain that could be excluded upon selling or exchanging QSBS depended on when the shares were acquired. For shares acquired for cash before Feb. 18, 2009, 50% of the gain could be excluded; 75% could be excluded for shares acquired for cash after Feb. 17, 2009, and before Sept. 28, 2010; and 100% could be excluded for shares acquired after Sept. 27, 2010.

For QSBS acquired after July 4, 2025 (the applicable date), the Act reduces the holding period requirement to three years and introduces a tiered benefit structure:

• QSBS held for three years: 50% exclusion
• QSBS held for four years: 75% exclusion
• QSBS held for five years or more: 100% exclusion

Consider: Taxpayers are no longer required to hold QSBS for more than five years to exclude gains on QSBS acquired after the applicable date, although the benefit is greater if held for five years or more.