Before the One Big Beautiful Bill was passed, Section 1202
allowed a taxpayer who held QSBS for a minimum of 5 years to
exclude 100% of the gain from gross income. Now, Section 1202 has a
more relaxed tiered-system in place, that ties the percentage of
gain that a taxpayer may exclude to the amount of time that has
passed since they acquired the QSBS. Stock acquired after July 4,
2025 is subject to these exclusion rates:
" 3 years: 50%
" 4 years: 75%
" 5 years or more: 100%
However, all non-excluded gain is subject to the 28% gains rate, not the standard long-term capital gains rates with a maximum of 20%.
Example: John purchases $100,000 worth of QSBS in an AI start-up on July 20, 2025. On August 30, 2027, John decides to sell the stock. The stock is now worth $1,000,000, which means John will realize a gain of $900,000. No portion of this gain is excludable under Section 1202. Thus, the long-term capital gains rate of 20% applies, and John's tax liability is $180,000. If instead John sells his stock on August 30, 2028 when the stock is still worth $1,000,000, Section 1202's 50% exclusion rate would apply. Therefore, John can exclude $450,000 of gain while the other $450,000 is subject to a 28% gains rate, making John's tax liability $126,000.
Bottom Line: The One Big Beautiful Bill allows a taxpayer to utilize Section 1202 for a holding period of less than 5 years, but a partial exclusion does not equal a proportionate reduction in taxes.
"Sometimes you just have to put on lip gloss and pretend to
be psyched."
― Mindy Kaling
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
