What Changed With QSBS Tax Exclusion in 2026?

If you're a startup founder holding qualified small business stock, the rules just changed. And realistically, most founders I talk to haven't heard about it yet. Right?

The One Big Better Budget Act of 2025 updated Section 1202 QSBS rules in ways that matter for your exit planning. Let me break down what actually changed and what you need to do about it.

The Big Numbers: What Changed?

For stock issued after July 4, 2025:

Exclusion cap went from $10M to $15M (50% increase)
Gross asset threshold jumped from $50M to $75M
NEW tiered holding periods:
- 50% exclusion at 3+ years
- 75% exclusion at 4+ years
- 100% exclusion at 5+ years

For stock issued before July 4, 2025, the old rules still apply. Five-year hold, $10M cap.

Here's the thing. If you have both pre-July and post-July stock, you want to sell the pre-OBBBA stock FIRST. That way you maximize your exclusion across both regimes. Right?

Why This Matters for Founders

I work with founders who are 12 to 18 months from exit. And when I tell them about these changes, the reaction is usually surprise. They thought they knew the rules. But the rules moved.

Let's say you're sitting on $20M in gains from qualified small business stock. Under the old rules, you could exclude $10M. Under the new rules for post-July stock, you can exclude $15M. That's $5M more working in your favor.

But here's where it gets tricky. The tiered holding periods mean timing matters more now. Are you selling at year 3? Year 4? Year 5? The difference between 50% and 100% exclusion is massive. Realistically, you need to map your exit timeline against these new tiers.

The State Tax Trap Nobody Talks About

This is the part that catches founders off guard. QSBS federal treatment is one thing. State treatment is another.

Non-conforming states that tax QSBS at full ordinary rates:

California
Alabama
Mississippi
Pennsylvania

If you're a California founder and you think you're getting the full exclusion, you're not. California doesn't conform to Section 1202. You'll owe state tax on the gain even if you qualify federally.

Now compare that to Texas. Zero state income tax means zero state tax on QSBS gains. The combined tax burden is dramatically different. Right?

I've had founders call me after they already sold. They found out about the state trap too late. Planning timeline should start 1 to 2 years before anticipated sale. Not after.

How Do Founders Plan Around These Changes?

It sounds complicated but realistically, the framework is simple.

Step 1: Identify which shares are pre-July 2025 vs post-July 2025. Your cap table should show this.

Step 2: Map your expected exit timeline. Are you looking at year 3? Year 4? Year 5? The tiered exclusions mean each year has a different payoff.

Step 3: Factor in state tax. If you're in a non-conforming state, you need to model the state tax hit separately from federal.

Step 4: Coordinate with your tax advisor on the sell order. Pre-OBBBA stock first, then post-OBBBA. That sequencing maximizes your total exclusion.

What Physicians Who Own Practices Need to Know

This isn't just for tech founders. Physicians who own their practices can also qualify for QSBS if structured as C corporations with gross assets under $75M.

I've talked to practice owners who didn't realize their equity could qualify. Same rules apply. Same $15M cap. Same state tax traps. If you're in California and own a practice structured as a C corp, you need to know about the non-conformity issue.

The Bottom Line

The QSBS changes are significant. $15M exclusion instead of $10M. Tiered holding periods that reward patience. State tax traps that catch founders off guard.

Most founders I meet are focused on building the product. Which makes sense. But there's nothing to say you can't plan for tax efficiency on the side while you build. Right?

It's actually pretty simple. Know which shares you have. Know your timeline. Know your state. Plan 1 to 2 years ahead.

The whole point of this is to make sure you're not leaving money on the table because the rules changed and you didn't know.

FAQ: QSBS Tax Exclusion 2026

What is QSBS Section 1202? QSBS (Qualified Small Business Stock) under Section 1202 allows founders and early investors to exclude capital gains from federal tax when selling qualified small business stock held for 5+ years.

What changed with QSBS in 2026? The One Big Better Budget Act of 2025 increased the exclusion cap from $10M to $15M, raised the gross asset threshold from $50M to $75M, and introduced tiered holding periods (50% at 3 years, 75% at 4 years, 100% at 5 years).

Which states don't conform to QSBS? California, Alabama, Mississippi, and Pennsylvania do not conform to Section 1202. Founders in these states owe state tax on QSBS gains even if they qualify for federal exclusion.

Should I sell pre-OBBBA stock before post-OBBBA stock? Yes. Sell pre-July 2025 stock first to maximize exclusion across both regimes. Pre-OBBBA stock has the $10M cap with 5-year hold. Post-OBBPA stock has the $15M cap with tiered holding periods.

How far in advance should I plan for QSBS? Start planning 1 to 2 years before your anticipated sale. This gives you time to structure the sale order, understand state tax implications, and coordinate with your tax advisor.

Malik is a fee-only fiduciary financial advisor working with tech entrepreneurs and physicians. He helps founders plan for tax-efficient exits and physicians build wealth through strategic planning. Reach out at moneytalkwithmalik.com.