Research note · Tax

QSBS After the 2025 Expansion: A Field Guide

Brian McRae · Founder & Portfolio Manager · Current as of July 2026 · 8 min read

Section 1202 of the tax code, the qualified small business stock exclusion, is the closest thing American tax law has to a cheat code. Hold the right stock in the right company for long enough and the federal government excludes some or all of the gain from tax. Not defers. Excludes. In July 2025 Congress rebuilt the provision and made it considerably more generous, and if you hold founder shares or early-exercised options in a C corporation, the details below apply to you directly.

A warning before the good news: QSBS is a qualification game, decided by facts set years before you sell. Most of the value in this note is in the checklist near the end, not the headline numbers.

The deal, in one paragraph

If you acquired stock at original issuance from a domestic C corporation that was a "qualified small business" at the time, and you hold it long enough, you can exclude gain up to the greater of a fixed dollar cap or ten times your basis, per issuer. Under prior law the cap was $10 million and the holding requirement was a five-year cliff: four years and eleven months got you nothing. The 2025 law changed both, for newly issued stock.¹

What changed on July 4, 2025

Three things, all applying to stock acquired after July 4, 2025:

Provision	Stock issued on or before 7/4/2025	Stock issued after 7/4/2025
Holding period	5-year cliff, all or nothing	Tiers: 50% excluded at 3 years, 75% at 4, 100% at 5
Per-issuer cap	Greater of $10M or 10× basis	Greater of $15M (inflation-indexed after 2026) or 10× basis
Company size test	≤ $50M gross assets at issuance	≤ $75M gross assets at issuance, indexed after 2026

Note what governs which column you are in: the date the stock was acquired, not the date you sell. Shares from your 2021 option exercise live under 2021 rules forever, five-year cliff and all. The same company can now have employees under both regimes, which is worth confirming rather than assuming.

The fine print that changes the math

The new 50 and 75 percent tiers come with a catch that almost every headline omits: the portion of gain that is not excluded gets taxed at a 28 percent federal rate, not the usual 20 percent long-term rate, plus the 3.8 percent net investment income tax.² Run the arithmetic and the 50 percent tier works out to an effective federal rate of about 15.9 percent on the whole gain, and the 75 percent tier to about 7.95 percent. Compare that to 23.8 percent on an ordinary stock sale. Very good. Not "half off," and not free, until year five.

There is also a quieter item: at the partial tiers, 7 percent of the excluded gain counts as a preference item for alternative minimum tax purposes. For most sellers this is a rounding adjustment, but it belongs in the model, not in the surprise column.

Why biotech people should be paying particular attention

QSBS was practically designed for early-stage life sciences. The companies are C corporations. They burn capital but often sit under the asset test at the seed and Series A stages, and the new $75 million threshold keeps them qualified deeper into their fundraising than before. If you joined early, some of your equity very likely qualifies. Three mechanics decide how much:

• The clock starts at exercise, not at grant. Options are not stock. Your five-year (or three- or four-year) clock begins when you exercise and actually hold shares, which is why early exercise paired with an 83(b) election is the single biggest QSBS accelerator available to employees.
• Original issuance only. The shares must come from the company to you. Stock bought secondhand from another shareholder does not qualify, no matter how long you hold it.
• The asset test is measured at your issuance. A company can be under the threshold when you exercised in 2026 and far over it by the time you sell in 2031. You keep your qualification. Your colleague who exercised two rounds later may not. Get the company's gross-asset confirmation for your issuance date while the CFO still answers email.

One boundary worth knowing: the excluded-industry list is unchanged, and it bars professional services, health services, finance, and hospitality. A company that develops a drug qualifies. A chain of clinics does not. Most therapeutics, platform, and tools companies sit comfortably on the right side of that line.

The five-question checklist

Was it a domestic C corporation when your shares were issued? Did the shares come to you at original issuance? Was the company at or under the gross-asset threshold at that moment, and can you document it? Has it been running an active qualified business since? And do you know your exact acquisition date for each lot? Answer all five in writing, today, while the records are easy to get. I have watched seven-figure exclusions survive or die on whether a 2019 spreadsheet could be found. There are also landmines around significant stock redemptions by the company near your issuance date; if buybacks happened, that is a conversation for a tax attorney, not a blog post.

The waiting math

Suppose $4 million of gain on post-2025 shares, sold by a California resident. Sell at year three and the federal bill runs about $636,000. At year four, about $318,000. At year five, zero. California collects its roughly $500,000 in every scenario. So the year-four-to-five wait is worth about $318,000 in this example. Most people can find a reason to wait one year for $318,000, and the new tiers mean that an acquisition you cannot control in year three no longer wipes out the whole benefit, which is the real gift of the 2025 changes.

And if you must sell early, Section 1045 still lets you roll proceeds into new QSBS within 60 days and keep the clock running.³ Fiddly, deadline-driven, occasionally exactly the right move.