Why Qualified Small Business Stock (QSBS) Just Became More Important for Founders
June 24, 2026
What is Qualified Small Business Stock and How Can it Benefit Founders? (Quick Answer)
Qualified Small Business Stock (QSBS) allows eligible founders and investors to exclude up to 100% of capital gains from federal taxes when selling qualifying C-corporation shares. Updated rules from the One Big Beautiful Bill Act (OBBBA) increased the exclusion cap to $15 million, raised the company asset threshold to $75 million, and introduced tiered exclusions starting after three years of holding the stock. These changes apply to stock issued on or after July 4, 2025.
Why Did QSBS Just Become More Important for Founders?
For founders building high-growth companies, equity ownership is often the largest driver of long-term wealth. Yet many entrepreneurs are unfamiliar with one of the most powerful tax incentives available to them: Qualified Small Business Stock (QSBS).
Qualified Small Business Stock refers to shares issued by certain C-corporations that meet eligibility requirements under Internal Revenue Code Section 1202. To qualify, stock generally must be issued by a U.S. C-corporation at original issuance, meet specific active business and asset requirements, and be held for a required period. If those conditions are met, taxpayers may exclude some or all of the capital gains from federal taxes when the shares are sold. This benefit can translate into millions of dollars in potential tax savings for founders and early investors.
Recent updates to QSBS rules expanded the program’s benefits and broadened the number of companies that may qualify — making the strategy even more relevant for business owners today. The policy behind QSBS is straightforward: encourage long-term investment in small and growth-stage businesses by offering a meaningful tax incentive at exit.
Key QSBS Rules Founders Should Know:
1. Up to $15 Million of Capital Gains May Be Excluded
The most significant benefit of QSBS is the capital gains exclusion. Under current rules:
- Taxpayers may exclude up to $15 million of gains per issuer
- Alternatively, they may exclude 10× their investment basis, whichever is greater
Beginning in 2027, the $15 million cap will be indexed annually for inflation.
For founders with meaningful ownership stakes, this exclusion can represent one of the largest single tax-saving opportunities available.
2. Earlier Liquidity Is Now Possible
Historically, investors needed to hold QSBS for five years to receive the full tax exclusion.
Updated rules introduce a tiered holding structure:
| Holding Period | Federal Exclusion |
|---|---|
| 3 to <4 years | 50% |
| 4 to <5 years | 75% |
| 5+ years | 100% |
This change may allow founders or early investors to access liquidity earlier while still receiving partial tax benefits.
3. More Companies Now Qualify
Another important update increased the asset threshold for qualifying businesses.
Previously:
- Companies needed less than $50 million in gross assets
Now:
- The threshold has increased to $75 million, expanding eligibility to a broader range of startups and growth companies.
This threshold will begin indexing for inflation starting in 2027.
4. Timing of Stock Issuance Matters
The expanded QSBS rules apply only to stock issued on or after July 4, 2025.
Stock issued before that date remains subject to the previous framework, including the five-year holding period for the full exclusion.
Because QSBS eligibility is determined when the stock is issued, early planning is important.
Summary of What’s Changed
| Key Provision | Previous Rules | Updated Rules* |
|---|---|---|
| Capital Gains Exclusion | Greater of $10 million or 10x basis | Greater of $15 million or 10x basis |
| Holding Period Benefit | No partial exclusion available before 5 years; 100% exclusion after 5 years | Tiered holding structure:
|
| Company Asset Threshold | Less than $50 million in gross assets at time of issuance | Less than $75 million in gross assets at time of issuance |
| Inflation Adjustments | No indexing | Exclusion cap and asset threshold indexed beginning in 2027 |
*Updated rules apply to qualifying stock issued on or after July 4, 2025.
How Washington State’s Capital Gains Tax Adds Another Layer of Consideration
While Washington does not have a traditional state income tax, the state introduced a capital gains tax that took effect in 2022.
Key features include:
- A 7% tax on long-term capital gains above a $278,000 annual threshold (for 2025 and adjusted annually).
- A higher 9.9% rate applies to gains above $1 million under legislation passed in 2025.
Washington’s capital gains tax has historically not required taxpayers to add back federally excluded QSBS gains, meaning founders who qualified for the federal exclusion generally avoided state capital gains tax on those gains as well.
However, recent legislative proposals have suggested changing this treatment — potentially requiring taxpayers to add back QSBS gains when calculating Washington capital gains taxes, which could subject those gains to state rates of 7% or 9.9%.
The proposal did not pass in 2025, but legislative interest remains. For founders in Washington, monitoring how state tax policy evolves around QSBS treatment is an important part of exit and liquidity planning.
Frequently Asked Questions
What is Qualified Small Business Stock (QSBS)?
QSBS is stock issued by certain C-corporations that may allow investors to exclude up to 100% of capital gains from federal taxes if specific requirements are met.
How much gain can be excluded under QSBS?
Taxpayers may exclude the greater of $15 million or 10× their investment basis in qualifying stock.
How long must QSBS be held?
Full tax exclusion typically requires holding the stock for five years, though partial exclusions may be available after three or four years.
Does Washington tax QSBS gains?
Historically, QSBS gains excluded at the federal level were generally not subject to Washington’s capital gains tax, because the state tax calculation begins with federal long-term capital gains.
However, legislative proposals could change this treatment in the future, potentially subjecting QSBS gains to Washington’s capital gains tax rates of 7%–9.9%.
When do the updated QSBS rules apply?
The updated QSBS rules apply to stock issued on or after July 4, 2025.
Final Thoughts
Qualified Small Business Stock has long been one of the most powerful tax incentives available to founders and early investors.
With expanded exclusion limits, broader eligibility, and more flexible holding periods, the provision has become an increasingly important consideration in founder tax and exit planning.
For business owners—especially those building high-growth companies—the combination of federal QSBS benefits and evolving state tax policies makes understanding these rules an important part of long-term financial planning.
If you’re a founder, investor, or early employee holding equity in a growing company, understanding whether your shares qualify for QSBS treatment should be a priority before any liquidity event. To learn more about how QSBS rules may apply to your situation, connect with a Freestone advisor to discuss planning strategies tailored to your circumstances.
Important Disclosures: This article is not intended to provide, and you should not rely upon it for accounting, legal, tax or investment advice or recommendations. We are not making any specific recommendations regarding any financial planning, investment or tax strategy, and you should not make any financial planning, investment or tax decisions based on the information in this article. This article is intended to be educational in nature and to discuss a few limited aspects of very complex legislation or other complex subject matters. This article is not a comprehensive or complete summary of considerations regarding its subject matter. We recognize that every individual has different needs and the opinions expressed in this article may not be appropriate for everyone. Please consult with a Freestone client advisor, accountant, or lawyer regarding options specific to your needs. Please note that Freestone does not approve or endorse any third-party content hyperlinked to in this article.