nvestors often look to small, emerging companies for portfolio diversification and growth potential, but these investments can offer more. Certain shares may also provide valuable tax advantages under the qualified small business (QSB) stock rules. And last year's One Big Beautiful Bill Act (OBBBA) enhanced those benefits.

The basics of QSB stock

A QSB is a domestic C corporation that meets specific requirements. First, the company must be engaged in an active trade or business. Many professional service businesses are excluded, though certain health- and engineering-related companies may qualify, depending on the nature of their activities.

There's also a gross-asset limit. Before the OBBBA, a company's aggregate gross assets generally couldn't exceed $50 million. The OBBBA increases the asset ceiling to $75 million (adjusted for inflation after 2026) for stock issued after July 4, 2025.

Shorter holding periods

The major tax benefit of investing in QSB stock is the potential exclusion of capital gains when the stock is sold. Before the OBBBA changes went into effect, you generally needed to hold QSB stock for at least five years to qualify for a capital gains exclusion, with the exclusion percentage ranging from 50% to 100%, depending on when the stock was acquired.

Under the OBBBA, a new tiered system with smaller exclusions applies to QSB stock acquired after July 4, 2025. It provides a 50% exclusion for stock held for at least three years and a 75% exclusion for stock held for at least four years. Any gain not excluded under these partial exclusions is generally taxed at a special 28% federal rate, plus the 3.8% net investment income tax, if applicable.

QSB stock acquired on or before July 4, 2025, generally remains subject to the prior rules, including eligibility for a 100% exclusion after five years for stock acquired on or after September 28, 2010.

Expanded gain exclusion limits

The OBBBA also increased the limit on the amount of gain you can exclude. For QSB stock acquired after July 4, 2025, the per-issuer exclusion limit is the greater of $15 million (adjusted for inflation after 2026) or 10 times the aggregate adjusted basis of stock sold during the tax year. Before the OBBBA change went into effect, the dollar limit was $10 million. (Both amounts are halved for married taxpayers filing separately.)

To qualify for the exclusion, you generally must acquire the stock at original issuance — directly from the corporation or through an underwriter — in exchange for cash, property (other than stock) or services. Limited exceptions apply, including certain transfers by gift or inheritance.

If you reinvest proceeds from a QSB stock sale into other QSB stock within 60 days, you may be able to defer the gain until you dispose of the new stock. The rolled-over gain reduces your basis in the new stock. For determining long-term capital gains treatment, the new stock's holding period includes the holding period of the stock you sold.

Moving forward

QSB stock can offer valuable tax benefits. But the rules are complex and require careful planning. Additionally, some states don't conform to federal treatment, so state income taxes may still apply, depending on the state. Contact us if you have questions.