§1202 QSBS · Post-OBBB (P.L. 119-21) explainer
QSBS §1202 — The Post-OBBB Rewrite
OBBB (P.L. 119-21) rewrote §1202 for stock acquired after July 4, 2025. The changes are big enough that most articles you'll find are now wrong about the AMT. Here's what actually changed, what still matters, and how to plan around it.
What changed on July 4, 2025
| Feature | Pre-OBBB (2010-09-28 – 2025-07-04) | Post-OBBB (acquired after 2025-07-04) |
|---|---|---|
| Holding period → exclusion | more than 5 years → 100% (cliff, nothing before; not on the 5th anniversary) | 3y → 50%, 4y → 75%, 5y → 100% (tiered) |
| Per-issuer cap | Greater of $10M or 10× basis | Greater of $15M or 10× basis (indexed from 2027) |
| Gross-asset ceiling (at all times through issuance) | $50M | $75M (indexed from 2027) |
| AMT preference (§57(a)(7)) | No preference on 100% exclusion (post-2010 vintages) | No preference on any tier — 50%, 75%, or 100% |
| Rate on included §1202 remainder | Up to 28% + 3.8% NIIT | Up to 28% + 3.8% NIIT |
| Rate above the cap | Regular LTCG (20% + 3.8% NIIT top) | Regular LTCG (20% + 3.8% NIIT top) |
Vintages before 2010-09-28 (50% / 75% exclusion rates) carried a 7% AMT preference item; that legacy AMT rule was never OBBB's target and is not the same thing as the post-OBBB partial-tier debate.
The five qualification tests, in plain English
- Domestic C-corporation. The issuer must be a C-corp when the stock is issued and during substantially all of your holding period (the same test applies to the active-business requirement). S-corp stock, LLC units, and partnership interests are never QSBS.
- Original issuance. You must acquire the stock directly from the company (or via a §1202-preserving transaction) in exchange for money, property (not stock), or services.
- Gross-assets test. The company's aggregate gross assets must never have exceeded $75M (stock issued after July 4, 2025) / $50M (earlier stock) at any time from August 10, 1993 until your stock was issued, and must not exceed it immediately after the issuance (counting what you paid). Assets of a parent-subsidiary group are added together. A company that once topped the ceiling can't issue QSBS later, even after its assets fall back below it. A later crossover doesn't disqualify already-issued stock.
- Active qualified trade or business. At least 80% of assets used in a qualified business — excluded fields include:
- Health
- Law
- Engineering (personal services)
- Architecture (personal services)
- Accounting
- Actuarial science
- Performing arts
- Consulting
- Athletics
- Financial services
- Brokerage services
- Banking / insurance / financing / leasing / investing
- Farming (including timber)
- Extraction (oil, gas, minerals)
- Hospitality (hotels, motels, restaurants)
- Holding period. Measured from the actual stock-acquisition date — option exercise, not grant; SAFE/note conversion, not signing.
Tier math — the $10M worked example
Founder holds post-OBBB QSBS acquired 2025-09-01, basis $100,000, expected gain $10,000,000. Per-issuer cap = max($15M dollar cap, 10 × $100k = $1M) = $15M(dollar cap wins), so the entire $10M gain is eligible.
- Held 2 years → 0% exclusion → $10M × 23.8% = $2,380,000 (regular LTCG)
- Held 3.5 years → 50% exclusion → $5M included × 31.8% = $1,590,000
- Held 4.5 years → 75% exclusion → $2.5M × 31.8% = $795,000
- Held 5+ years → 100% exclusion → $0
These use top rates: 28% on the included §1202 gain (20% on regular long-term gain) plus the 3.8% NIIT on all of it. NIIT applies only to gain that lifts modified AGI over $200,000 single, $250,000 joint.
The AMT correction
If you read anywhere that partial §1202 exclusion creates AMT leakage, that's pre-OBBB content. OBBB amended §57(a)(7) so there is no AMT preferenceitem for the new 50% or 75% tiers, nor for post-enactment 100% exclusions. The old warnings about 7% of excluded gain becoming an AMT preference were tied to pre-2010-09-28 vintages and never applied to the modern 100% tier.
Sold early? §1045 rollover
If you sell QSBS you have held for more than six months but before the applicable exclusion holding period, IRC §1045 lets you roll the proceeds into new QSBS bought within 60 days of the sale and defer the gain (not available to corporations; gain is deferred only to the extent you reinvest), preserving (and tacking) the original holding-period clock. Stock held six months or less doesn't qualify. Election is made on your return for the year of sale; missed elections generally can't be fixed.
Advanced note — QSBS "stacking"
Gifting QSBS into non-grantor trusts to multiply the per-issuer cap ("stacking") exists, is aggressive, and requires real tax counsel — not a checkbox. We don't publish a how-to.
State non-conformity
Several states don't conform to §1202. Notably, California taxes the excluded gain at ordinary income rates — the "$0 federal" outcome can still leave a meaningful state bill. Confirm your state's conformity before relying on the federal number.
FAQ
Do I really pay 0% federal tax on $15M of QSBS gain?
Yes, for stock acquired after July 4, 2025 that meets every §1202 qualification test and is held at least 5 years. The excluded amount is capped per issuer at the greater of $15,000,000 or 10× your aggregate basis. Post-OBBB there is also no AMT preference on the excluded gain (OBBB amended §57(a)(7)).
What if I sell at year 3?
Under post-OBBB rules, a 3-year hold locks in a 50% exclusion. The included half is taxed at up to 28%, plus the 3.8% NIIT on gain above the NIIT threshold, so at top rates the federal rate on the whole gain is about 15.9% (before state tax). A 4-year hold pushes exclusion to 75% and the effective rate to about 7.95%; 5 years gets you to 0% on the eligible piece.
Does my SAFE or option grant start the §1202 clock?
No. The holding period starts when you actually acquire the stock — option exercise (not grant), SAFE or note conversion (not signing), and equity purchase at the closing date. Until you own stock, the §1202 clock hasn't started.
Is S-corporation stock eligible for §1202?
Never. §1202 requires that the issuer be a domestic C corporation when the stock is issued and during substantially all of your holding period (§1202(c)(2)(A); the same test applies to the active-business requirement). S-corp stock, LLC interests, and partnership interests are categorically ineligible.
Related
- QSBS §1202 Calculator
- Capital Gains Calculator
- Home Sale §121 Exclusion
- S-Corp Guide S-corp stock is never QSBS
Sources & References
Primary references used for this content
OBBB — Significant Changes to §1202 QSBS
Practitioner analysis of the enacted text.
View on perkinscoie.com
QSBS gets a makeover — §1202's new look
Post-OBBB tiers, cap, AMT change, planning notes.
View on thetaxadviser.com
26 U.S.C. §1202
Statutory text.
View on law.cornell.edu
✓3 primary sources; links re-checked on a weekly rotation by the source watcher
Disclaimer: This calculator provides estimates for educational purposes only. Not tax, legal, or financial advice. Results may vary based on your specific circumstances. Consult a qualified CPA or tax professional for personalized guidance.