QSBS Stock Options: You Could Save $15 Million
The Big Beautiful Bill made some key updates to QSBS – and they’re worth your attention.
Before we get into the Qualified Small Business Stock (QSBS) basics, let’s take a quick look at what just changed for QSBS in the Big Beautiful Bill.
The core rules for QSBS didn’t go away, but the new changes expand how it works – including shorter holding periods, a bigger exclusion cap, and a higher threshold for company size when stock is issued.
Capital gains exclusions are now tiered instead of requiring a five-year holding period:
- 3 years = 50% exclusion
- 4 years = 75% exclusion
- 5 years = 100% exclusion (still the full benefit)
This change gives founders, early employees, and investors a bit more flexibility – especially if a full five-year hold isn’t in the cards.
The lifetime exclusion cap is going up:
Historically, QSBS let you exclude up to $10 million in capital gains. Under the new bill, that cap increases to $15 million for qualifying stock.
The company asset threshold has also been raised:
To qualify for QSBS, the company had to be under $50 million in assets at the time the stock was issued. That threshold is now $75 million. Just like before, any stock issued after the company crosses that threshold won’t qualify.
Inflation indexing starts in 2027:
Both the $15 million gain exclusion and the $75 million asset threshold will be indexed for inflation beginning in 2027. This helps preserve the benefit over time, especially for companies and investors planning longer holds.
So…now that we’ve covered the changes, let’s get into it.
QSBS is one of the most powerful tax breaks.
Yes, you read that right. If you’re talking tax breaks that can save you millions of dollars when you go to sell your company, that list isn’t very long. QSBS is one of them.
QSBS can eliminate up to $15 million in capital gains taxes when you sell your shares (or even more if you stack exclusions properly) making it one of the most powerful tax strategies for startup founders and investors alike.
If you meet the requirements under Section 1202 of the Internal Revenue Code, your stock gains could be 100% tax-free after a five-year holding period.
This has massive implications for:
Startup exits and acquisition planning
Equity compensation strategies for early employees
Angel investor tax optimization
Estate planning for entrepreneurs
If you’re running a high-growth business or holding stock in one, understanding QSBS rules could mean the difference between paying millions in taxes…or paying nothing at all.
But don’t wait until you’re already prepping for an exit – planning ahead is key to taking advantage of this tax treatment. Keep reading for a break down of QSBS requirements.
QSBS Eligibility: The 4 criteria to qualify for the QSBS tax break.
- Your business is a C corporation.
- You bought your stock before the company has $75 million in assets, or vested in your stock before $75 million in assets. (The key here is filing an 83(b) Election. More on that below!)
- Hold your shares for 3-5 years (years held determines exclusion percentage).
- You acquired the shares directly through the company, not through a secondary offering.
Your clock on your QSBS capital gains starts with your 83(b) Election.
The 83(b) Election is a really important piece of paperwork for founders.
Filing an 83(b) Election doesn’t just start the clock for short-term and long-term classification of your shares. It also starts the 5-year clock for QSBS qualification. (And a full exemption with QSBS can exclude up to $15 million in proceeds!)
In addition, if you don’t file an 83(b) Election, you have to wait *5 years from the date that your founder stock vests. So, say it vests over 4 years. That means you have to hold this stock for 9 years before you can qualify for this million-dollar savings.
Learn more about 83(b) Elections here.
*Now 5 years for 100% exclusion, 4 years for 75%, 3 years for 50% – one of the updates from the Big Beautiful Bill.
Understanding how QSBS applies to your investors is important when negotiating.
In the early rounds – before you have $75 million in assets – any investor who pays you directly for your shares also starts the QSBS clock.
For individual investors, they will also receive the maximum exemption ($15 million in proceeds) if they hold their shares for the full 5 years.
For funds, that’s calculated at the LP level. If you get into the inner workings of their business, each of their investors is given up to $15 million in tax exemption. So, say a fund has 100 LPs – that’s 100 members that can receive exclusions up to $15 million (translating to almost unlimited capital gains).
And yes – funds are aware of this. As a founder, you should also be, too, when thinking about valuation.
One other thing to think about is QSBS will not apply to investors in the round that takes you over $75 million in assets.
As people are investing and you’re putting more rounds together, you need to think about some of the thresholds that your investors are facing.
One of the cool things for your investors is they, too, can take advantage of the $15 million tax-free if they hold your stock for over 5 years. On top of that, for LLCs, SPVs, or funds that invested in you, that $15 million limit applies to each of their investors individually.
For example, a fund that has 10 members who equally invested in it could exclude the first $100 million in proceeds from their investment.
Build your QSBS stock option plan so that your employees can early exercise their shares.
Qualified Small Business Stock should impact your decisions when building your stock option plan, too. If you allow your employees to early exercise in the stock option plan (and they exercise their shares before you have $75 million in assets), they start their QSBS clock. All they have to do is hold those shares for *5 years, and then your employees can benefit from QSBS tax breaks, too.
*Now 5 years for 100% exclusion, 4 years for 75%, 3 years for 50% – one of the updates from the Big Beautiful Bill.
QSBS FAQs
What is QSBS?
So let’s break down QSBS. The way I like to do this is talk about a real example, because then it kinda becomes clear. Let’s say Greenlight did a seed round in 2024 at $7.5 million. Anybody that invested or got founder shares and did their 83(b) Election or any employees that exercise their option before the seed round should qualify. And all the investors / angel investors before that should qualify for QSBS. They should have started their clock, their five-year clock. As long as the seed round didn’t take them over $75 million in assets, they qualify.
Fast forward to 2025, Greenlight did their Series A, and it was about a $16 million round. So getting closer to the $75 million in assets.
Fast forward to 2026, they do the $80 million round. Nobody in that round can take advantage of QSBS. It’s definitive now – they have $75 million in assets as a result of that because they got $80 million in cash. So anybody that didn’t file their 83(b) Election can’t take advantage of this anymore…even if they wait out the holding period. So this is just a huge missed opportunity for those people in that chain if they didn’t file the 83(b) or didn’t exercise their stock options before they cross that $75 million threshold.
For all of those other people that did this, there’s a huge value that has been created for them because they get to individually exclude the first $15 million of proceeds from their tax bill, if they sell their stock after that five-year period.
Now, if they sell after three years, they can still cash in at 50% exclusion, and 75% exclusion if they sold after 4 years.
What are the criteria you have to meet for QSBS tax treatment?
Criteria:
- You have to be a seed corporation.
- You have to have bought your stock before the company has $75 million in assets or vested in your stock before they have $75 million in assets.
- You have to hold the shares for five years to claim 100% exclusion. Alternatively, you can sell your shares after three years for 50% exclusion, or four years for 75% exclusion.
- You can’t have acquired the shares in a secondary offering (so you have to acquire them directly from the company).
So, if you meet these four criteria, you can qualify for saving tons of money!
What are QSBS considerations for founders and co-founders?
For a founder, following your 83(b) election doesn’t just start the clock for short-term and long-term classification of your shares, but it also starts the five-year clock for QSBS classification. If you start it now by filing the 83(b) election, you could qualify for QSBS in three years at 50%, four years at 75%, and five years at 100%. If you don’t file the portion of your founder stock that vests – say it vests over four years – you could vest over four years, then start the three-year clock. So, that’s almost seven years before you’re able to qualify for part of this tax benefit.
What are QSBS considerations for employees?
A really crucial thing to think about when you’re designing your stock option plan is your employees, and whether or not you’re gonna allow your employees to early-exercise their options. So remember the QSBS clock – the three years you have to hold your stock – does not start for an option holder until they exercise their shares. So, if you don’t allow early exercise, they might vest over four years. The first time they could exercise their shares might be four years from now. Then they would exercise their shares and the clock would start for at least three more years. So – seven total years to take advantage of the QSBS, and nine total years if you want to claim the full benefit. If you design your option plan so they can early exercise, your earliest shareholders or employees that got options might choose to exercise those early and start that clock. That starts their capital gains clock, and it starts the QSBS clock. So, then they would only have to hold those shares for three more years. The other thing that this allows them to do is exercise the shares before you hit that $75 million in an asset threshold. Remember if they exercise after that threshold, they don’t qualify for QSBS.
What are QSBS considerations for investors?
How QSBS applies to your investors is really important for you to understand as you’re negotiating. In the early rounds, before you have $75 million in assets, any investor who pays you directly for your shares will also receive the maximum. They can exclude $15 million of proceeds from their tax calculation if they hold that stock for over five years. So, if you get into the inner workings of their business, each of their investors has that exclusion to work with.
Qualified Small Business Stock is very nuanced.
If you’ve read everything up until this point, it’s clear that QSBS has some pitfalls to know and avoid. But we know this tax advantage is something that you, your investors, and your employees cannot afford to lose. It’s millions of dollars, after all!
Looking for some expert guidance? We’re here to help. Book a free consultation today to start working with our team – that’s one day closer to saving over lots of money.