The 2025 Amendments to Section 1202: What the New QSBS Rules Mean for Founders

Last year’s tax legislation raised the qualified small business stock exclusion cap, replaced the five-year holding cliff with a tiered schedule, and lifted the gross-asset ceiling. The changes interact with transaction structure, and holders of pre- and post-amendment stock are now subject to two different sets of rules.

For founders and early shareholders selling a company, Section 1202 of the tax code can be worth as much as any single term in the purchase agreement. Qualified small business stock, or QSBS, can allow a holder who meets its requirements to exclude millions of dollars of gain from federal tax at exit. 

In July 2025, Congress amended the provision significantly, and 2026 is the first full tax year under the new regime. The changes are large, they are generally favorable, and they interact with deal structure in ways that reward early planning. Exit models built on the old rules are worth rerunning. 

Two caveats frame everything that follows. QSBS eligibility has requirements this article does not cover, including C corporation status, original issuance, and an active qualified business, and whether any particular stock qualifies is always a facts-and-circumstances question. And CGL does not provide tax advice: the analysis below summarizes the deal-side considerations, and holders should review their specific situation with a tax advisor. 

What changed 

Three changes matter most, and all three turn on the date of July 4, 2025. 

First, the five-year cliff is gone. Under the prior rules, a holder who sold at four years and eleven months received no Section 1202 exclusion at all. For stock acquired after July 4, 2025, the amended statute provides a tiered schedule instead: a 50 percent exclusion after three years, 75 percent after four, and 100 percent after five. Partial credit now exists, which matters in a market where sellers cannot always choose their timing. 

Second, the cap went up. For stock acquired after July 4, 2025, the per-issuer dollar cap rises from $10 million to $15 million, indexed for inflation after 2026. Two refinements matter. The cap has always been the greater of the dollar figure or ten times the holder’s basis in the stock, and the ten-times-basis alternative is unchanged; for holders with meaningful basis it can exceed both numbers. And the old and new caps are not separate buckets: exclusions claimed against one vintage of a company’s stock draw down the cap available on the other. 

Third, more companies qualify. For stock issued after July 4, 2025, the gross-asset ceiling rises from $50 million to $75 million, also indexed. The test looks at the company’s whole history: gross assets must never have exceeded the ceiling at any time through, and immediately after, the issuance. This creates a planning window. A company that outgrew the old $50 million test but has never crossed $75 million may be able to issue qualifying stock again, and the window remains open only until the balance sheet closes it. 

The complication: two regimes side by side 

The new rules are not retroactive. Stock acquired on or before July 4, 2025 keeps the old rules, the five-year cliff and the $10 million dollar cap. Stock acquired after that date gets the new ones. 

Many founders and early employees now hold a mixed basket, and the two piles can be worth meaningfully different amounts per dollar of gain at different exit dates. An exit model that treats all shares the same can get the answer wrong, and so can an option-exercise or secondary-sale decision made without checking which regime the resulting shares fall under. 

Where transactions affect QSBS 

The reason this belongs in a deal newsletter rather than a tax alert is that QSBS treatment is often preserved or lost in transaction structure, frequently without the issue being raised at the time. 

A few recurring examples, each of which depends heavily on the specific facts. Rollover structures in a sale can preserve QSBS treatment or forfeit it depending on how they are built. Entity reorganizations, including the F-reorganizations that often precede a sale, can affect eligibility if run without QSBS in mind. A sale structured as an asset deal rather than a stock deal changes the analysis entirely. And a holder who sells before the third anniversary under the new tiered schedule may still have options, including a Section 1045 rollover into new qualified stock, but only if the exit is structured to allow it. 

Buyers have taken note as well. Whether stock qualifies as QSBS is a question that increasingly appears in diligence, and sellers are better positioned when they know their answer before the letter of intent rather than after. 

Planning considerations 

The practical checklist is short. Holders benefit from knowing which of their shares sit under the old rules and which under the new. Companies that previously exceeded the $50 million asset test can determine whether they are under the new $75 million ceiling, since the window to issue qualifying stock stays open only while the balance sheet allows. And before any reorganization, secondary sale, or exit negotiation, QSBS belongs on the list of things the structure has to protect. 

None of this requires acting years in advance. It requires knowing the answer before the term sheet arrives. 

This article summarizes a complex statute at a high level and leaves out requirements and edge cases that can change the outcome. It is a map of what to ask about, not advice on any particular holding. 

How CGL can help 

CGL structures financings, reorganizations, and exits for founders and sellers, working alongside clients’ tax advisors, and treats QSBS preservation as part of every structure review. To discuss the amendments in the context of a planned raise, reorganization, or sale, a 30-minute call can be scheduled here.