One Big Beautiful Bill - Tax Impact for Founders, Shareholders and Venture Capital Funds
In the years leading up to the enactment of the “One Big Beautiful Bill,” the capital gains exemption provisions for Qualified Small Business Stock (QSBS) under Section 1202 faced multiple attempts to reduce tax benefits, but none were successfully legislated. With the passage of this Bill, the Senate instead expanded the QSBS tax benefits for shares acquired on or after July 4, 2025.
Specific Expansions of QSBS Tax Benefits
Reduced Holding Period Requirement
The original requirement of holding QSBS for at least five years has been lowered to at least three years. For a small number of shareholders exiting before meeting the holding period, there was already an option to use the rollover mechanism under IRC §1045 (QSBS Rollover) to reinvest in other QSBS shares within 60 days, thereby deferring taxes or stacking holding periods to meet the five-year threshold.However, due to various restrictions — especially the narrow 60-day rollover window — most exiting shareholders could not use the QSBS Rollover. This tax reform significantly lowers the threshold, which may accelerate the exit timeline for startups and increase activity in U.S. capital markets.
Tiered Capital Gains Exemption
If held for at least 3 years but less than 4 years → 50% capital gains exemption.
If held for at least 4 years but less than 5 years → 75% exemption.
If held for 5 years or more → 100% exemption.
The exemption limit is the greater of 10× the cost basis or $15 million. Compared to QSBS acquired before this year’s Independence Day, not only is the holding period substantially reduced, but the limit has also been increased from the prior 10× or $10 million to 10× or $15 million.
Starting in 2027, the $15 million cap will be adjusted annually for inflation.Higher Asset Cap for Issuing Companies
The total gross assets of the issuing company before issuance have increased from $50 million to $75 million, also with annual inflation adjustments starting in 2027. This benefits high-capital-intensity industries such as biotechnology by attracting more startup investment capital.
Core Structural Requirements Remain Unchanged
While QSBS tax benefits have expanded, the original framework requirements remain:
The 10× or $15 million exemption applies per company. Thus, serial entrepreneurs starting a new venture after an exit can re-use the QSBS tax benefit.
During most of the holding period, the QSBS must be C-Corp stock and at least 80% of the company’s assets must be used in a qualified trade or business. While the law does not require meeting these criteria 100% of the time, certain companies — particularly those wholly owned by a family or individual — may create legal uncertainty if they convert to S-Corp status during the holding period.
Shareholders must be non-corporate shareholders — i.e. individuals, trusts, or investors acquiring QSBS through investment funds (typically partnerships for U.S. tax purposes). Excess gains above the exemption cap may still be multiplied through the use of multiple non-grantor trusts.
The shareholder must acquire QSBS directly from the company, not from another shareholder. However, QSBS obtained via gift, inheritance, or in certain tax-free reorganizations is treated as directly acquired. Founders may therefore consider creating and gifting QSBS to non-grantor trusts to multiply exemption amounts for tax savings.
Post-Reform Dual Tax Savings for Fund General Partners (GPs)
For fund general partners, the post-reform QSBS 3-year holding requirement now matches the 3-year holding period required for carried interest to qualify as long-term capital gains. Since most U.S. venture capital funds use a partnership tax structure, careful coordination of:
The structure for acquiring QSBS within the fund,
The structure for acquiring and holding carried interest,
Filing an 83(b) election to lock in the acquisition date of unvested interests,
Tracking QSBS qualification status,
can yield extraordinary tax savings for GPs.
