QSBS After July 4, 2025: Which Holding-Period and Exclusion Rules Apply?
The familiar QSBS shorthand used to be simple: hold qualifying stock for more than five years, and some or all of the gain may qualify for the Section 1202 exclusion.
That shorthand is no longer enough.
Federal law changed in 2025. For qualifying stock acquired after July 4, 2025, Section 1202 now allows the exclusion to phase in after three years instead of requiring every shareholder to cross a five-year threshold first.
But the date matters in more than one way.
The date you acquire the stock can determine which exclusion regime applies. The date the corporation issues stock can determine which gross-assets threshold applies.
Those are different tests.
The first question: when did you acquire the stock?
For Section 1202's exclusion regime, stock falls into different periods based on its acquisition date.
Stock acquired on or before February 17, 2009
After satisfying the legacy holding-period requirement, the general exclusion percentage is 50%.
Stock acquired after February 17, 2009 and on or before September 27, 2010
The general exclusion percentage is 75%.
Stock acquired after September 27, 2010 and on or before July 4, 2025
The general exclusion percentage is 100% after the required legacy holding period.
Stock acquired after July 4, 2025
| Holding period | Potential Section 1202 exclusion |
|---|---|
| At least 3 years | 50% |
| At least 4 years | 75% |
| At least 5 years | 100% |
The percentage is only one part of the calculation. The stock still has to qualify as QSBS, and the amount of eligible gain remains subject to Section 1202's per-issuer limitation.
Acquisition date and issuance date are not interchangeable
For the new phased exclusion regime, Section 1202 looks to when the taxpayer acquired the stock. The statute includes a special acquisition-date rule that takes applicable Section 1223 holding-period rules into account.
Separately, the 2025 increase in the qualified-small-business gross-assets threshold applies to stock issued after July 4, 2025.
A QSBS analysis may therefore need to establish when the corporation issued the stock, when the taxpayer is treated as acquiring it, and when the relevant holding period began.
The exclusion is not simply "$10 million tax-free"
Section 1202 limits eligible gain from stock of a particular issuer. The calculation generally compares the applicable dollar limit with 10× the adjusted basis of qualifying stock of that issuer disposed of during the year. The greater amount can control.
The legacy dollar limit
For stock acquired on or before July 4, 2025, the statutory dollar component is generally $10 million, subject to reduction for eligible gain previously taken into account from the same issuer. For married filing separately, the corresponding legacy amount is generally $5 million.
The new dollar limit
For stock acquired after July 4, 2025, the statutory dollar component for 2026 is $15 million. It is not automatically a fresh $15 million for every sale. Section 1202 coordinates the limit with eligible gain from prior years and, in relevant mixed-regime situations, eligible gain from stock of the same issuer acquired on or before July 4, 2025.
Inflation adjustments to the $15 million amount begin for taxable years after 2026.
The 10× basis alternative can be larger
Suppose qualifying legacy stock has:
- adjusted basis: $2 million;
- eligible gain: $25 million;
- no prior eligible gain from that issuer.
The legacy dollar component is $10 million. But:
10 × $2 million = $20 million
The relevant eligible-gain limitation can therefore be $20 million rather than $10 million.
The exclusion percentage applicable to that eligible gain is a separate question.
Mixed acquisition dates require extra care
A shareholder can own several blocks from the same company under different Section 1202 regimes. Those blocks should not automatically be treated as one homogeneous QSBS position. Historical records matter even when the current sale involves only newer shares.
Older QSBS can also have a different AMT result
Under current Section 57(a)(7), 7% of certain excluded Section 1202 gain from stock acquired on or before September 27, 2010 is treated as an alternative minimum tax preference. Do not generalize that rule to modern 100%-exclusion QSBS.
What if the exclusion is only 50% or 75%?
A partial exclusion does not mean the remaining gain automatically receives the ordinary long-term capital-gain rate treatment people usually expect. Legacy taxable Section 1202 gain can interact with the special 28%-rate-gain framework. Acquisition date, AMT treatment, and other capital gains can matter.
The new rules do not relax the rest of Section 1202
A three-year holding period does not make otherwise nonqualifying stock QSBS. Original issuance, qualified-small-business status at issuance, the applicable gross-assets test, active-business requirements, C-corporation status, and redemption restrictions still matter.
A useful way to analyze a QSBS sale
- Does the stock qualify?
- Which acquisition-date regime applies?
- Has the required holding period been reached?
- How much eligible gain can be taken into account?
Related PRISM guides
Sources and authority
Sources and authority
- IRC §1202(a)
- IRC §1202(b)
- IRC §1202(d)
- IRC §57(a)(7)
- Public Law 119-21, §70431
Where this becomes a professional question
Review becomes especially important with stock acquired before and after July 4, 2025, prior QSBS gain from the same issuer, a potentially larger 10× basis limitation, gifts/inheritance/partnership distributions/conversions/reorganizations, substantially nonvested stock, pre-2010 QSBS, or nonstandard sale structures.
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