One of the most popular articles I've written on this newsletter is The Most Powerful Tax Break in America, in which I break down exactly how QSBS works.

With the new tax bill signed on July 4 2025, this already crazy generous tax break has become even more powerful.

So I figured it's a great time to break down exactly what's changed and what some of the more interesting second-order effects are for anyone who may be eligible for QSBS.

While QSBS is for anyone who owns shares in a C-Corp, it's typically most relevant for startup founders, employees and investors.

Let's dive in.

For an overview of how QSBS works, I recommend reading my original article. Here, I'm only going to focus on what changes as of July 4 2025.

There are three major changes to QSBS legislation as a result of the new tax bill:

1 - Greater dollar exclusion per shareholder from $10M to $15M

The old QSBS limit was set at the greater of $10 million per shareholder or 10 times the basis on the shares.

The new QSBS limit moves the number to $15 million or 10 times the basis on the shares.

While the increase in the headline number is a massive 50% increase, the reality is likely to be even larger.

The $15 million is indexed to inflation starting December 31, 2026. This means from 2027 onwards, the QSBS exclusion will rise every single year automatically. 

You will be able to leverage whatever the maximum exclusion amount is during the year you sell (and not the year you buy)… so it could end up being $17 or $18M!

2 - A company can now have up to $75M in assets to qualify as a "small business"

To qualify as a small business, the business had to have a maximum of $50M in assets during the time a shareholder bought their shares.

This number has been increased to $75M... and critically, is also indexed to inflation starting in 2027 so we'll start seeing that number increase with time.

3 - Partial QSBS eligibility now kicks in after 3 years

One of the most onerous QSBS requirements used to be that you needed to hold shares for 5 years to see any benefit.

If you sold your shares prior to that, you either had to do a QSBS rollover or were out of luck.

The new legislation introduces the idea of "partial QSBS" as follows:

- 50% exclusion if you hold shares for more than 3 years, and less than 4 years

- 75% exclusion if you hold shares for more than 4 years, and less than 5 years

- 100% exclusion for 5+ years

The new QSBS legislation applies to all shares purchased on or after July 5, 2025. 

This means all existing shares purchased prior to this date would not be eligible for the improved and updated QSBS exclusions.

However, there are several ways existing shareholders can work around this:

An existing shareholder could always get a new share grant that would be subject to the new QSBS rules.

This would allow them to effectively hold multiple classes of shares with different QSBS eligibility that they could "layer" together.

They could sell the original shares up to the $10M exclusion, and then use the extra $5M+ on the newer shares.

If employees have an existing option grant that has not been exercised, they are in luck!

They can now exercise the original grant anytime after July 4 2025 and be subject to the new QSBS rules.

This is a fantastic way for existing stakeholders to leverage the new ruling.

This is likely the most dramatic option and almost certainly not worth it unless the business is very, very new.

But if you started a new C-Corp and bought shares only a few weeks before the new ruling, it may make sense to start over from scratch.

This gets incredibly tricky and I would not recommend doing this with proper legal guidance. Even then, I suspect it's not going to be worth the additional hassle and legal fees.

But, you could presumably cancel your existing share grants and reissue new shares to take advantage of the new ruling.

You would have to tread very carefully here. The new grants would have to look and feel substantially different in terms of quantity and structure.

And if the 409a valuation has moved against you, this could leave you in a far worse position since you could owe taxes immediately.

Since the QSBS limit applies per-shareholder, QSBS stacking refers to transferring shares to friends, family members and other trusts for the benefit of your beneficiaries to multiply your exclusion.

This strategy will continue to work with even greater effectiveness than before. Now, each additional taxpayer will now give you an additional $5M+ to work with.

When I sold my last startup, I was able to multiply QSBS 3 times, which still left me with a hefty tax bill.

However, with the new restrictions, that would have been $45M exempt from taxes... which could have resulted in me paying no taxes at all.

Prior to the new QSBS legislation, the only way to preserve QSBS if the company was acquired prior to 5 years was doing a Section 1045 QSBS Rollover.

This strategy is still valid if you have held the shares for more than 6 months and less than 5 years. 

You can pay no taxes on the proceeds as long as you reinvest the capital into another qualifying C-Corporation within 60 days of the sale.

However, in some cases now, you may not choose this option if you would rather use the partial QSBS option and immediately get a 50% or 75% exclusion.

One of the most insane strategies I've ever seen is "packing" your QSBS by first creating an LLC, running it up to a large asset value and then converting it to a C-Corp.

As long as you stay under the asset value to qualify as a small business, you could use the 10 times your basis rule to get an exclusion of quite literally, hundreds of millions of dollars.

The new legislation means you could now use this strategy to theoretically get $700M+ tax-free!

If you are a startup founder, it's vitally important you read about and understand exactly how QSBS works.

Even if you are a non-US founder of a US-based entity, this could be relevant for all your shareholders that are in America.

This tax rule affects not just you, but every single stakeholder in your company - each and every one of your investors and employees.

And once your business reaches a meaningfully large valuation, setting up structures to stack or multiply QSBS is likely the single most important tax move you will make in your life.

If you want to learn more about not just QSBS, but the rest of what personal finance as a startup founder is about, I'm teaching a free workshop on August 22.

I'll cover:

You can sign up here or by clicking the image above. I’ll also send a replay to everyone who joins.

This week was a deeper dive into a very specific tax topic that may or may not cater to everyone reading.

But… we’ll be back to regular programming next week.