How I Made $5000 in the Stock Market

Small Businesses Got This Juicy Tax Break in the New Law

Dec 28, 2025 04:00:00 -0500 | #Taxes

Assisting a customer at a hardware store in San Francisco. (David Paul Morris/Bloomberg)

Key Points

Investors in qualified small business stock (QSBS) got a boost under the One Big Beautiful Bill Act passed in July.

Not only did a QSBS tax break get more generous—investors can shield up to $15 million in QSBS capital gains from taxes, up from $10 million—but the universe of taxpayers who are eligible for an exemption has expanded. The rule changes apply to stock issued after July 4, 2025.

QSBS shares are issued by C corporations and are generally available to founders and early-stage investors.

“It’s easy to look at this and say, ‘Here’s another break for rich people.’ But this provision was established to help small businesses and level the playing field with big companies, and it hasn’t been updated for a long time,” says Brian Gray, a partner at the accounting firm Gursey Schneider.

QSBS rules were established in 1993 with an exemption on 50% of gains up to $10 million or 10 times an investors’ cost basis, whichever was higher. But few investors took advantage of the rule because some exempted gain had to be counted as income when calculating the alternative minimum tax (AMT).

“This made tax results unfavorable for many investors,” says Jere Doyle, senior estate planning strategist at BNY Wealth.

In 2010 the AMT addback was eliminated, and the exemption was raised to the greater of 100% of gains of up to $10 million or 10 times the cost basis. But the $10 million wasn’t adjusted annually, and over the next 15 years its value was eroded by a cumulative 49% inflation rate.

Changes under the new tax law are a modernization of the rules, Gray says.

Aside from increasing the exemption cap to $15 million, the new tax law expanded eligibility for C corporations to issue QSBS to those with assets of up to $75 million, up from $50 million.

And while previously investors had to hold stock for at least five years to be eligible for any capital-gains tax exclusion, now there is a tiered schedule that enables a partial benefit with shorter holding periods: Investors can exclude 50% of gains after a three-year holding period, and 75% after four years.

After five years, investors can exclude 100% of gains up to $15 million or 10 times the cost basis, whichever is greater. The exemption on QSBS issued before July 5, 2025, is subject to the old $10 million cap or 10 times the cost basis.

“The most relevant limit for most people is going to be $10 million or $15 million depending on when the shares were issued,” says Kevin Brady, an advisor at Wealthspire.

But if your business hits a home run and has explosive growth, dollar limits on exemptions may be irrelevant and you would want to exempt 10 times your cost basis, Brady says.

Assume you receive 1,000 shares of QSBS valued at $3 million this year and sell the shares after five years for $33 million.

Under regular tax treatment, assuming today’s tax rates, the $30 million in gain would be subject to federal capital-gains taxes at a top rate of 20%, plus the 3.8% net investment income tax, for a total tax rate of 23.8%. After taxes, you would have $22.86 million, Brady says.

Under QSBS rules, you would be eligible to exempt 10 times your $3 million cost basis, leaving you with a tax-free $30 million, Brady says.

Two other important changes: Any QSBS gains beyond the tiered or full exemptions are subject to a 28% federal tax rate rather than the 20% highest capital-gains tax rate; and exemption thresholds will be adjusted for inflation beginning in 2027.

While the new rules are a big deal for many investors, the benefits can be magnified if you are planning to leave QSBS shares to your heirs, says Brian Schultz, a tax partner at Plante Moran.

If you have more gains than can be excluded from tax, you can gift them to heirs who can also potentially get the benefit of the QSBS exemption, he says.

For example, if you have QSBS gains of $40 million and you use the maximum $15 million exemption, you can give remaining gains to your child who can also exempt $15 million from taxes.

Typically donors use trusts to pass on wealth, but to get the QSBS exemption it’s important to choose a non-grantor trust and to set up separate trusts for each heir, so they can each get the QSBS exemption, Schultz says.

“I have a client couple who used up the exemption and wanted to leave shares for two daughters,” he says. “If they had set up a single shared trust for the daughters, they would have created the opportunity for one more exemption. But they created a trust for each daughter, essentially tripling the exemption.”

The more generous QSBS rules are likely to encourage more business owners to structure their businesses as C corporations, Doyle says.

Small businesses are usually structured as pass through entities, because profits and losses flow to the owners’ personal tax returns.

“In initial years of operation you’d probably have losses, which with a pass-through could flow through to partners or LLC members and used as offsets on personal income tax returns,” Doyle says.

But the higher QSBS exemption could tip the scales toward a C corporation structure, Doyle says. “Especially if founders feel they will have a pot of gold at the end of the rainbow.”

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