Qualified Small Business Stock (QSBS) Just Got Better: What Founders Need to Know Now

By: Benjamin Jacob

When founders think about building wealth through startups, Qualified Small Business Stock (QSBS) under Section 1202 of the Internal Revenue Code has long been one of the most powerful tax planning tools available. But with the recent passage of the One Big Beautiful Bill Act (OBBBA) on July 4, 2025, things just got even better for startup founders, investors, and early employees.

Here’s a breakdown of what changed — and what it means for you.

A Quick Refresher: What Is QSBS?

QSBS is a special class of stock issued by qualified C-corporations that allows for partial or full exclusion of capital gains from federal income tax when the stock is sold. For years, founders and early investors who met certain requirements could exclude up to 100% of their gains — up to $10 million or 10x their basis — if they held the stock for at least five years. Check out this Fourscore primer for more information on QSBS Basics.

The OBBBA’s Major QSBS Upgrades

The OBBBA changes three core components of QSBS for stock acquired after July 4, 2025:

TL;DR: More companies qualify, the benefit is available sooner, and the cap is higher.

Founder Scenario: How One Founder’s Tax Bill Just Got Way Smaller

Taylor, a first-time founder who incorporated their Delaware C-Corp in August 2025 received common stock in exchange for IP and services. Imagine that Taylor raises a $2M seed round in December and plans for a Series A in late 2026. After selling the company in mid-2029, here’s what QSBS treatment looks like:

• Holding Period: 4 years (falls between 3–5 years)

• Gain on Exit: $6 million

• QSBS Status: 75% exclusion

Under prior QSBS rules, Taylor wouldn’t have hit the 5-year mark and would have owed capital gains taxes on the full amount. Now, under OBBBA’s tiered system, they qualify for a 75% exclusion — paying tax only on $1.5 million of the gain instead of the full $6 million. That’s a potential tax savings of over $1 million, depending on their personal tax rate.

Strategic Planning Considerations for Founders

If you’re a founder raising or issuing equity after July 4, 2025, these changes open new planning opportunities:

• Earlier Liquidity Events: You may not need to wait 5+ years to sell and still enjoy substantial tax savings.

• More Room for Growth: Higher gross asset limits mean more later-stage companies may still qualify.

• Cap Table Management: Coordinate QSBS eligibility with early employees and investors — good planning can significantly impact everyone's post-exit outcomes.

• Entity Formation Timing: If you’re still on the sidelines about incorporating, now may be a great time to form your C-Corp.

What You Can’t Do: Beware of QSBS "Refresh" Loopholes

The OBBBA also closes potential loopholes by disallowing “refresh” strategies, such as trying to swap old QSBS for new shares after July 4, 2025 to take advantage of the new rules. The acquisition date rules emphasize that only newly issued shares after July 4, 2025, count for the enhanced benefits — not stock swapped in tax-deferred deals.

Final Thoughts

The QSBS changes under the OBBBA make it an even more attractive vehicle for founders and early stakeholders to build tax-efficient wealth — but only with thoughtful corporate legal and tax planning. Whether you're launching a new startup, issuing founder stock, or preparing for a fundraising round, it’s time to revisit your QSBS strategy.

Need help navigating the new rules? Fourscore’s team is ready to advise you and your startup. We help founders make informed decisions that protect long-term upside. Book a call today.

Common Questions About QSBS Tax Savings Under the New Law

• Q: What is Qualified Small Business Stock (QSBS) and why does it matter for founders?

  A: QSBS is stock issued by qualifying C-corporations that lets founders and investors exclude capital gains from federal taxes when they sell. It's one of the most powerful tax planning tools available to startup founders and early employees.

• Q: How did the One Big Beautiful Bill Act (OBBBA) change QSBS rules?

  A: The OBBBA, passed July 4, 2025, made three major upgrades to QSBS for stock acquired after that date: more companies now qualify, benefits are available sooner, and the exclusion cap is higher. In short, founders no longer need to wait as long to see savings.

• Q: Do I still have to hold QSBS stock for 5 years to get the tax break?

  A: No, you don't need to wait the full 5 years anymore. Under the new tiered system, stock held between 3 and 5 years can still qualify for a 75% gain exclusion, letting founders benefit from earlier liquidity events.

• Q: Can North Carolina founders use a "refresh" strategy to apply new QSBS rules to old stock?

  A: No, the OBBBA specifically closes this loophole. Only shares newly issued after July 4, 2025 qualify for the enhanced benefits, swapping old stock for new shares in a tax-deferred deal doesn't count.

About Fourscore Business Law

Whether you're launching a startup, raising capital, or navigating M&A, our experienced team provides strategic, world-class legal counsel that supports your vision and enables confident decision-making at every stage of growth. Fourscore Business Law empowers forward-thinking entrepreneurs and business leaders by simplifying complex legal transactions. With a focus on efficiency and personalized service, we help you overcome legal challenges so you can focus on innovation and scaling your business. Ready to secure your startup's future? Take our free legal assessment for founders today to better understand your company’s legal health.

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