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2025 July Update

On July 4, 2025, Trump signed the One Big Beautiful Bill Act, which significantly expanded QSBS benefits for startup founders and investors. Here is what changed:
These changes apply to stock issued on or after July 4, 2025; earlier issues follow old thresholds.

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Overview

QSBS is a powerful tax rule that can save startup founders and early employees a lot in taxes when they sell their shares. If you meet the right conditions, you might owe no federal taxes on your profits, even if you make millions. The benefit can be substantial.

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Tax-free gains

With QSBS, you can avoid federal tax on the greater of:
  • $15M of gain, or
  • 10× your purchase price (adjusted for inflation).
You also get partial benefits earlier:
  • 50% of this amount after 3 years
  • 75% after 4 years
  • 100% after 5 years
Purchased shares for $40, sold 3 years later for $100M
  • Gain = $100M – $40 = $99,999,960
  • QSBS cap = $15M
  • At 3 years, 50% applies → $7.5M of the gain is tax-free
When it’s time to file taxes, your CPA will report the gain on Schedule D, apply the QSBS exclusion under Section 1202, and attach any supporting documentation.

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Qualification

Most startups naturally qualify for QSBS because incorporation and legal setup handle the groundwork. Here’s the full criteria:
  • The stock must be issued directly to you, not bought on the secondary market.
  • You must be an individual U.S. taxpayer, not an entity or trust.
  • You must hold the stock for 5 years to get the full benefit.
  • The issuing company must be a U.S. C Corporation when the stock is issued.
  • The issuing company must have less than $75M in gross assets at issuance.
  • The issuing company must not primarily earn revenue from investing or passive income, such as a VC fund or crypto hedge fund.
If your company and stock meet these conditions from the start and you hold them correctly, you likely qualify. QSBS status is determined at issuance, so getting it right early is important.
QSBS isn’t something you apply for. You qualify automatically if your company and stock meet the rules, so your focus should be on not getting disqualified.

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Transactional events

Selling before 3 years
To qualify for the QSBS tax break, you need to hold the stock for at least 3 years. If you sell before then, a Section 1045 rollover gives you a second chance at the full tax break only if you reinvest the gains into a new QSBS-eligible company (a U.S. C-corp under $75M in assets) within 60 days. This allows you to defer taxes while continuing toward the 3-year mark. The IRS lets you combine holding periods, so if the total adds up to 3-5 years, your original gain can still be fully tax-free. Company getting acquired
It’ll all depend on the deal structure. Stock-for-stock deals do not trigger a sale for QSBS purposes, so it’s as if you’re still holding the stock. Cash or non-stock payouts trigger a taxable sale, which stops your QSBS clock. You’ll owe taxes on the gain and potentially be able to use QSBS if you qualify. Every transaction is unique though, so you should consult with your company and personal tax experts. Merger or share conversion
QSBS status often can continue in a merger or reorganization, especially if the deal is tax-free. This depends on the deal structure, so legal review and clean records are essential. Exercising stock options
This is more common for employees who were granted company options that allowed them to early exercise, or they’ve left the company and exercised within a deadline. The QSBS clock does not start when options are granted. It starts when it’s exercised and shares are actually received. Transferring shares
Like gifts or trusts. In some cases, like gifts to family or transfers at death, QSBS can carry over to the new owner. But if you transfer your shares to a company, fund, or partnership, QSBS status is usually lost. Selling partial shares
You’ll only get the QSBS tax break on the portion you hold for the full 5 years. The rest is taxable. Company used to be an LLC
The QSBS timeline starts only once the company becomes a C-corp. Any time spent as an LLC doesn’t count toward the 5 years.

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Common questions

Do I need to apply for QSBS?
No. If your company is a U.S. C-corp and had less than $75 million in assets when you got your stock, then QSBS applies automatically. You don’t need to fill out a form, QSBS just kicks in if you meet the criteria. Do I need to track my QSBS qualifications?
Not really. There’s no QSBS app or tracking spreadsheet you need to maintain. Keep records of when and how you got your shares (e.g., purchase, early exercise), and avoid actions that disqualify you. Should I pay for QSBS validation certificates?
No. These services are costly and not useful if you are not close to an exit. Paying for a certificate early on does not guarantee anything because you could still get disqualified later. QSBS eligibility depends on the law and timing, not on a third-party piece of paper.

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Best practices

Set things up correctly early and avoid common mistakes that could cost you the tax break.
  • Incorporate as a C-corp before issuing any equity.
  • Issue founder stock early and file 83(b) election within 30 days.
  • Be mindful of your company’s gross assets as it has to be <$75M at the time of issuance.
  • Maintain access to records like incorporation documents, cap table history, purchase agreements, and board approvals. You don’t need to collect every record upfront, but make sure you can access them when needed.