QSBS rules under Section 1202 after the 2025 US tax law

Qualified small business stock (QSBS) under Section 1202 of the US Internal Revenue Code lets eligible holders exclude some or all of the gain when they sell startup shares. The One Big Beautiful Bill Act, enacted on July 4, 2025, changed the rules for stock acquired after that date. For founders and early employees of US corporations, the changes affect when an exit becomes tax-efficient.

New QSBS holding periods

Before the 2025 law, the exclusion required a holding period of more than five years. Stock sold earlier received no exclusion. For QSBS acquired after July 4, 2025, the statute now sets a tiered exclusion:

• Held at least 3 years: 50% of the gain excluded.
• Held at least 4 years: 75% excluded.
• Held 5 years or more: 100% excluded.

Perkins Coie notes that holders of stock acquired on or before July 4, 2025 cannot restart their holding period to reach the shorter windows.

Higher per-issuer cap

The exclusion is capped per issuer at the greater of a dollar limit or 10 times the holder's adjusted basis. The 2025 law raised the dollar limit from $10 million to $15 million for stock acquired after July 4, 2025. The statute indexes the $15 million amount to inflation for taxable years beginning after 2026. The 10-times-basis alternative is unchanged. Stock acquired before the change stays under the $10 million cap. Perkins Coie adds that the dollar limit is halved, to $7.5 million, for married individuals filing separately. Once a holder uses the full $15 million for an issuer, later inflation adjustments do not increase their cap for that issuer.

Higher gross-assets ceiling

A company must meet a gross-assets test when it issues the stock. For stock issued after July 4, 2025, the ceiling rose from $50 million to $75 million. The Startup Law Blog notes that the $75 million figure is also indexed starting in 2027. The higher ceiling lets companies raise larger early rounds and still issue qualifying stock.

Requirements that did not change

The new law left the core eligibility tests in place. The Startup Law Blog lists them: domestic C corporation status, original issuance, the gross-assets tests, and active-business rules during substantially all of the holding period. Perkins Coie notes that certain service, financial, farming, natural resource and hospitality businesses remain excluded. Holders with stock from both before and after July 4, 2025 must track each block separately.

Why Canadian founders should pay attention

QSBS applies to domestic US C corporations. A Canadian corporation does not qualify. Canadian founders who restructure under a US parent, often called a Delaware flip, to raise from US investors may bring QSBS into scope for future share issuances. That decision carries Canadian tax consequences too, and it needs advice on both sides of the border.

Founder takeaways

• Record acquisition dates for every share block. The rules depend on whether stock was acquired before or after July 4, 2025.
• Document gross assets at each issuance. Keep the evidence with your corporate records.
• Model exit timing against the 3, 4 and 5 year tiers. Share the model with your board before an acquisition offer arrives.
• Get cross-border advice before a flip. QSBS is one factor. Canadian tax treatment is another.

This article is general information, not legal or financial advice. Speak with a qualified Canadian lawyer or accountant about your situation.

General information. This article is general information, not legal, tax or financial advice. Confirm the details with a qualified professional before you act.

Sources

1. 26 U.S.C. § 1202: Partial exclusion for gain from certain small business stock
   Office of the Law Revision Counsel, US House of Representatives
2. Significant Changes by the One Big Beautiful Bill Act to the Qualified Small Business Stock Provisions of Section 1202
   Perkins Coie · 2025
3. What the 2025 Law Changed About QSBS
   The Startup Law Blog