How to Leverage OBBBA/QSBS to Make More Money -

The One Big Beautiful Bill Act (OBBBA), signed July 4, 2025, introduces the most significant tax reforms for venture capital in over a decade with real implications across the investment ecosystem, see our article on why market downturns are prime time to start generational companies. Here what it means for venture capital, limited partners, and founders alike:

The OBBBA’s overhaul of Section 1202 delivering founder, and investor friendly changes. It rewards long-term growth capital while giving more flexibility for earlier exits.

First, lets start with understanding QSBS.

What is qualified small business stock (QSBS)?

The qualified small business stock (QSBS) exclusion is a U.S. tax benefit that applies to eligible shareholders (Investors, Founders, VCs) of a qualified small business (QSB). Because founding, investing in, and working for a startup can be riskier by nature, the QSBS exclusion helps encourage people to take that risk.

The QSBS tax exclusion is set forth in Section 1202 of the U.S. Internal Revenue Code. When shareholders sell or exchange their qualified stock, the exclusion can provide a break on capital gains tax, potentially up to 100% exclusion of tax on capital gains.

QSBS QUALIFYING CRITERIA:

The company must be active US-based (C-Corp)
Shares must be purchased from the company directly (meaning secondaries don’t qualify)
Shares must be held for at least five years

The company must be in a qualified industry (most software qualifies). At least 80% of a company’s assets must be actively used in a qualified trade or business.

Excluded business types are determined by the IRS and include companies that:

Perform services related to health, law, engineering, architecture, accounting, actuarial science, performing arts, consulting, athletics, finance, banking, insurance, leasing, investing, or brokerage
Rely on an employee or owner’s reputation (i.e. if it endorses products or services, uses an individual’s image, or has an employee make appearances at events or on media outlets.)
Produce products, such as fossil fuels, for which percentage depletion (a type of tax deduction) can be claimed
Operate a hotel, motel, restaurant, or similar business
Are a farming business

The company must have $50M or less of Gross Assets at the time of the share issuance (this includes cash from the financing round, and is different from the company’s valuation). The $50M is now $75M after signing the OBBBA on July 4^th, 2025

Qualified small business stock (QSBS) rules for eligibility for LPs & Investors and shareholders in general

If all of the above conditions are satisfied, US taxpayers (which may include founders, company employees, angel investors, venture investors and LPs) can benefit from significant tax savings.

Your actual securities will only be QSBS-eligible after an exercise and conversion of options (including ISOs, NSOs, and ISO/NSO splits), warrants, or convertible debt into stock. Once you hold the stock, confirm whether your company is a Qualified Small Business, as defined by the IRS and outlined above. Only individuals, trusts, or other pass-through entities may hold QSBS stock.

QSBS holding requirements: What qualifies as QSBS?

You must hold your QSBS-eligible stock for at least five years in order to qualify for the tax benefit if you purchase before the OBBBA signing on July 4, 2025 or 3 years after as detailed below. If you hold eligible shares, you may be subject to tax liabilities on the sale of those shares if you decide to sell before the holding period has been completed.

Qualified Exits:

When the five-year holding period is over (or 3 after July 4), you may sell your QSBS qualified stock and potentially exclude up to 100% of capital gains from your federal taxes if you’ve met all required conditions.

Tender offers (buyback events),
Bilateral secondary transactions, and
IPO events

Those are some of the ways you can sell private company stock.

The New One Big Beautiful Bill Act (OBBBA)

The One Big Beautiful Bill Act (OBBBA), signed July 4, 2025, introduces the most significant tax reforms for venture capital in over a decade with real implications across the investment ecosystem by Trump Administration. Here what it means for venture capital, limited partners, and founders alike:

OBBBA Objective: The Sweeping package aimed at boosting American innovation and capital formation. Buried in the bill is Section 70431, which dramatically expands the Qualified Small Business Stock (QSBS) exclusion under IRC 1202

Investors & LPs: Enjoy greater upside potential, more flexibility on exit timing, and scalable tax shields via QSBS tax benefits, even for longer term, high growth investments.
Startups & Founders: Qualify for better capital access through tax advantaged financing. Bonus depr. and R&D expensing improvements further fuel growth.

Under prior law, only QSBS held more than 5 years qualified for exclusion. Under the new law:

Holding Period	Gain Exclusion
3 years	50%
4 years	75%
5+ years	100%

This only applies to stocks acquired after July 4, 2025.

For stock issued on or before July 4, 2025, the old rule (5 years = 100% if post-2010) still applies.

QSBS Gain Cap Raised from $10M to $15M

The per-issuer gain exclusion cap is increased:

$10 million cap for stock issued on or before July 4, 2025.
$15 million cap for stock issued after July 4, 2025, with an inflation adjustment starting in 2027
Coordinating rules prevent double-dipping across old and new caps

Also worth noting: If you hit the $15M cap, future increases won’t raise your limit for that issuer.

Company Asset Threshold Increased to $75M

Previously, to be able to issue QSBS, the company had to have < $50 million in gross assets at and before the issuance. Now, that threshold increases to $75 million, with inflation adjustments starting in 2027. This expands eligibility to more mature startups and growth companies—especially relevant in tech and life sciences where early funding rounds are often large.

Planning Implications

Shorter hold, earlier tax break: Investors can exit after 3 years and still benefit.
More issuers qualify: Higher asset threshold opens the door to later stage startups.
New cap, new strategy: The $15M exclusion makes QSBS more compelling for venture scale investments.

Before vs After Comparison

Aspect	Before OBBBA	After OBBBA
QSBS Holding Period	5+ years ➝ 100% tax-free gains	3 years ➝ 50%, 4 years ➝ 75%, 5 years ➝ 100%
Per-Taxpayer Cap	$10M lifetime	$15M lifetime (+50%), indexed from 2027
Aggregate Assets Limit	$50M qualified assets threshold	$75M threshold (median Series B still eligible)
Capex & R&D Expensing	Bonus depreciation phasing out	100% bonus depreciation now permanent

Big Wins for Investors & LPs

Boosted QSBS Incentives: The act enhances Section 1202, lowering the holding period to 3 years (50% gain exclusion), 4 years (75%), and 5 years (100%), while raising the per‑issuer cap from $10M to $15M and increasing the corporate asset limit from $50M to $75M, both indexed for inflation.
Small Business Expensing: Reinstates 100% bonus depreciation and raises the Section 179 cap, boosting near term deductions .
Expanded Investment Horizons: With enhanced clarity and broader applicability around QSBS and SPVs, and easier cross border capital treatment, investors gain flexibility (implied in expanded QSBS applicability) .
Enhanced Protections: New transparency and standardized reporting provisions strengthen LP oversight, though not specific to QSBS, they enhance fund governance under OBBBA.
Carried Interest & Partnership Tax: OBBBA leaves carried interest treatment unchanged, but shifts in partnership tax and Section 199A rules could affect structure and after tax IRRs.

Expanded Investment Horizons: Relaxed restrictions on cross border capital flows and clearer tax treatment of SPVs open doors to new opportunities in global growth markets.
Enhanced Protections: LPs benefit from improved transparency requirements for fund managers and standardized reporting frameworks, boosting trust and accountability.

For Startup Founders

Runway Relief: Permanent 100% bonus depreciation and immediate R&D expensing (via Section 174A) cut upfront costs and improve runway .
Easier Liquidity: New QSBS rules allow earlier exits with tax benefits: 50% after 3 years, 75% after 4, and full exclusion at 5 years. Plus, higher caps and asset thresholds support larger deals .
Secondary Liquidity: Expanded QSBS provisions invite more flexibility in secondary markets—subject to original-issue limitations .
Growth Headwinds: While OBBBA enhances tax benefits, macro variables (like inflation, interest rates, federal budget constraints) may temper growth—though not directly enacted by this bill.
Research and Development (R&D) Deduction: Full expensing for domestic R&D expenditures made permanent under new Section 174A.
QSBS Gains Amplified: The bill raises the cap on Qualified Small Business Stock from $50M to $75M, indexed for inflation, an estimated +125% asset base increase over 1993.
Easier Access to Capital: Simplified fundraising compliance reduces barriers for early-stage founders raising across jurisdictions.

Strategic Takeaways

Issuance & IPO Timing: Issue stock after July 4, 2025 to qualify for upgraded QSBS benefits .
Exit Strategy Alignment: LPs and GPs to model exits at 3-, 4-, and 5-year milestones for tiered tax exclusion optimization.

Bottom Line

OBBBA significantly enhances QSBS, making tax-advantaged exits more accessible, expensing more favorable for scalability, and offering improved flexibility for both investors and founders. Timing issuances and exits around the July 2025 enhancements is now a vital strategic lever.

How to Leverage OBBBA/QSBS to Make More Money