How the OBBB Supercharges Section 1202 for Tech Founders and Investors

On July 4, 2025, President Trump signed into law the One Big Beautiful Bill (OBBB), ushering in one of the most significant pieces of tax reform legislation since 2017. Among the bill’s most transformative provisions is a refresh of Internal Revenue Code Section 1202, which governs the exclusion of capital gains tax treatment on Qualified Small Business Stock (QSBS).

A powerful but often underutilized tool, Section 1202 now offers even greater potential for tech founders and investors to unlock tax savings. With enhancements that include higher exclusion thresholds, relaxed holding periods, and expanded eligibility, the OBBB has evolved QSBS into an emerging opportunity for tax-efficient growth and exit planning.

While many preexisting qualifications for QSBS remain, key enhancements to Section 1202 under the OBBB are as follows.

Increased Gross Asset Cap: More Companies Now Qualify as QSBS

Stock is only QSBS if at all times prior to and immediately after the issuance of stock the Company does not exceed the gross asset limitation. The OBBB raises this threshold from $50 million to $75 million, expanding the pool of eligible stock issuances.

Higher Gain Exclusion Limits: $15M Tax-Free Under the OBBB

For QSBS acquired after July 4, 2025, taxpayers may now exclude the greater of:

• $15 million, or
• 10 times their cost basis in the stock

For QSBS acquired on or before July 4, 2025, the prior limits still apply:

• The greater of $10 million, or
• 10 times their cost basis in the stock

This increased threshold provides an even more compelling incentive for early-stage investors and founders to explore QSBS structuring opportunities.

Tiered Holding Periods: Partial Gain Exclusion in Just Three Years

Historically, Section 1202 required a strict, five-year holding period to qualify for any capital gains exclusion. The holding period requirement was all or nothing – meaning, if you sold your stock after 4 ½ years you received no benefit. The OBBB introduces a graduated benefit for QSBS acquired after July 4, 2025:

• 50% exclusion for stock held at least three years
• 75% exclusion for stock held at least four years
• 100% exclusion for stock held at least five years

This tiered approach allows for greater flexibility in planning and provides meaningful benefits even for earlier exits.¹

Inflation Adjustments: Long-Term Protection for Founders and Investors

After 2026, both the $75 million gross asset threshold and the $15 million exclusion limit will be indexed for inflation, providing built-in adaptability to economic conditions and preserving the long-term value of the incentive.

Maximize QSBS Benefits Post-OBBB

The OBBB has expanded upon an already powerful tool for tax savings that can amount to substantial dollars. By growing company eligibility, increasing gain exclusion thresholds, and loosening holding period restrictions, the legislation creates new opportunities for tax-advantaged investment in the tech and startup sectors. However, qualification for Section 1202 remains highly nuanced. Careful planning is essential to ensure compliance with the statute’s many requirements.

For more information on how to structure and plan for QSBS tax treatment under the OBBB, please reach out to your KSM advisor or fill out the form below.

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[1] The portion of gain that is excluded under Section 1202(a) may be subject to a higher capital gain tax rate of 28%.