The Small Business Investment Act of 2025 makes sweeping changes to Qualified Small Business Stock (QSBS). Effective July 5, 2025, these reforms are designed to make QSBS even more attractive for employees, founders, and early investors.

Here’s a quick rundown of what’s changed and why it matters.

What is QSBS?

QSBS has been on the books since 1993, and it offers a powerful incentive for investing in small businesses: the opportunity to skip paying capital gains tax on the sale of the stock.

To qualify:

• the company must be a U.S. C corporation (LLCs and S-corps do not qualify);
• it must have less than $75 million in total gross assets when the stock is issued (up from $50 million);
• at least 80% of its assets must actively promote its trade activities; and
• and the company must be engaged in a “qualified trade or business,” generally not involving such businesses as healthcare, law, finance, and hospitality.
• For investors, the shares must be purchased directly from the company (subject to specific exceptions for gifts or inheritances).

What’s changing under the 2025 Act?

Tiered Capital Gains Exclusions

Previously, you were required to hold QSBS for five years before you could get a 100% capital gain exclusion. There is now a graduated system for QSBS that was issued on or after July 5, 2025:

• 3 years – 50% exclusion
• 4 years – 75% exclusion
• 5 years or more – 100% exclusion

This change offers earlier liquidity options to investors without reducing incentives to long-term holders.

Higher Per-Issuer Gain Cap

The lifetime exclusion limit by issuer is raised from $10 million to $15 million, with future inflation adjustments. When you own both pre- and post-Act QSBS of the same issuer, it can be beneficial to sell older shares first to maximize exclusions under both limits.

Increased Asset Threshold

The Act raises the threshold of size for company qualification as QSBS. With up to $75 million in gross assets, more later-stage startups qualify to take advantage of QSBS benefits.

Why it matters

The changes make QSBS more valuable as a tool to:

• Attract investors – Greater tax relief makes early-stage investing more appealing.
• Reward employees – QSBS can be utilized as part of employee compensation packages to attract and retain employees.
• Supporting founders – Preparing exits and liquidity events for QSBS can lead to significant tax savings.

All that being said, the distinctions between pre- and post-Act QSBS necessitate cautious tax planning.

Disclaimer

This is informational only and not tax, legal, or financial advice. Seek consultation with a competent tax advisor or attorney before making any QSBS decisions.