Qualified Small Business Stock (QSBS) was already possibly the best tax break in the IRS tax code, and now it has gotten even better. QSBS rewards investors in Qualified Small Businesses by giving them tax-free gains if certain conditions are met. The idea is simple: if you're taking the risk to build or back a Qualified Small Business, you get rewarded by paying no taxes on a significant portion of your gains.
The One Big Beautiful Bill Act of 2025 expands QSBS benefits even further. These new changes affect both investors and founders, and they’re worth understanding.
How the One Big Beautiful Bill Act Changes QSBS Rules
The One Big Beautiful Bill Act made three major updates to how QSBS works. Note that these changes apply to QSBS issued after the bill’s effective date of July 5, 2025. For stock issued July 4, 2025 and earlier, the old rules still apply.
1. You no longer have to wait five years to benefit from the QSBS tax break.
QSBS now has a tiered system for capital gains exclusions based on how long you’ve held the stock:
- After three years → 50% of the gain is tax-free
- After four years → 75% of the gain is tax-free
- After five years → 100% of the gain is tax-free (this part hasn’t changed)
This is a big deal for earlier exits. Founders and investors can now capture meaningful tax savings before hitting the five-year mark, which should help attract more investors and investor dollars into the US angel and VC markets.
2. The tax shield is bigger and will grow over time
The maximum QSBS benefit has been raised from $10M to $15M per taxpayer per company, and starting in 2027 it will be indexed for inflation.
3. More companies now qualify
The threshold for companies to be considered a Qualified Small Business has increased from a maximum $50M of tangible gross assets to a maximum of $75M. This number will also be indexed for inflation starting in 2027. A higher gross asset threshold means more later-stage startups can qualify as QSBS issuers. This opens the door to QSBS benefits for investors in many late-stage VC and PE rounds.
What This Means for Investors
The biggest shift is timing: investors can now realize QSBS tax benefits from an exit beginning after just three years instead of having to wait five years. This new tiered system makes early exits more tax-friendly, and helps solidify investing in QSBS companies as one of the best tax-adjusted returns of any asset class.
What This Means for Founders
For founders, the biggest takeaway is more flexibility with earlier liquidity, without giving up the QSBS shield entirely. Under the old rules, if a founder sold QSBS stock before the five-year mark they would not have received any QSBS tax exclusion at all; 100% of the gain would be taxable. Under the new rules, founders can sell off part of their startup ownership after just three-five years while still realizing tax-free gains on 50% - 75% of their profits.
The new $75M gross asset cap also means that more startups will now qualify as QSBS issuers. Over the long run, this should attract more investment dollars into the mid- and late-stage VC markets, which is also a strong benefit for founders.
Bottom Line
The new changes to the QSBS tax break are all net-positive to founders and investors. There is no catch. Startup investing, whether done as an angel investor or by investing in VC funds, has become even more attractive relative to other asset classes.
If you’re trying to figure out how to navigate these changes, we’re always happy to share what we’re seeing in the market and how others are adjusting. Please don’t hesitate to reach out.
This document does not constitute an offer to sell or the solicitation of an offer to buy any securities or investment product. Nothing contained herein shall be interpreted as either investment, legal, accounting, or tax advice. Right Side Capital Management does not provide tax or legal advice. You should contact your tax advisor, accountant and/or attorney before making any decisions with tax or legal implications. All information is provided solely for convenience purposes and all users thereof should be guided accordingly.
