I didn't run the math on my own QSBS exclusion until a lawyer asked me a number I couldn't answer: how much of my gain, in dollars, would actually be tax-free if I sold today versus a year from now. I'd read the headlines about the exclusion getting bigger. I had no idea what "bigger" meant for my specific cap table.
Here's the math I wish someone had walked me through first, because the answer isn't "QSBS got better." It's "QSBS got better on a schedule," and the schedule changes what your exit is worth by millions depending on the exact day your stock was issued and the exact day you sell.
The old ceiling versus the new one
Before July 4, 2025, the exclusion cap on Qualified Small Business Stock was the greater of $10 million or 10x your basis, and you needed to hold the stock five full years to get 100% of your gain excluded from federal capital gains tax. Five years, full stop. Sell at year four and eleven months, and you got zero exclusion on that gain, not a partial credit, nothing.
Stock issued after July 4, 2025 plays by different rules. The cap moved from $10 million to $15 million per issuer, and starting in 2027 that number adjusts for inflation. The five-year cliff is gone too. Now the exclusion phases in: 50% at three years held, 75% at four years, 100% at five years. The aggregate gross asset threshold for what counts as a "qualified small business" also moved, from $50 million to $75 million, which matters if your company raised a large seed or Series A and you were worried about falling outside the definition.
Run those two systems side by side on the same $30 million gain, and the difference isn't cosmetic:
- Pre-July 2025 stock, sold at year 5: up to $10 million excluded, tax-free. The remaining $20 million is taxed at standard long-term capital gains rates.
- Post-July 2025 stock, sold at year 5: up to $15 million excluded. On a $30 million gain, that's $5 million more sheltered than the old rule allowed, often north of $1 million in federal tax saved at current top capital gains rates, before state tax is even in the picture.
- Post-July 2025 stock, sold at year 3 instead of year 5: 50% of the gain qualifies for exclusion instead of 0%. On the same $30 million gain, that's up to $15 million potentially excluded two years earlier than the old rule would have allowed you to touch any exclusion at all.
That last line is the one founders miss. The new tiers don't just raise the ceiling, they change the earliest date an exit becomes tax-efficient at all. A founder who might have delayed a sale to hit the old five-year cliff may not need to delay nearly as long now.
The 28% trap hiding inside the "good news"
There's a catch that gets buried under the headline number. Any gain that isn't excluded under the 3-year or 4-year tiers doesn't fall back to normal long-term capital gains rates, it gets taxed at a flat 28% rate, which is higher than the 15% or 20% most founders expect to pay on long-term gains outside QSBS entirely.
Concretely: sell at year three, and you exclude 50% of your gain. The other 50% isn't taxed at 15-20%. It's taxed at 28%. Run the numbers before you assume "partial exclusion" is strictly better than waiting. On some deal sizes, the extra two years to hit the full five-year, 100%-exclusion tier and avoid the 28% rate on the remainder is worth more than cashing out early on the 50% tier.
Benchmarking your own exit against these numbers
If you're trying to figure out where you land, the questions that actually move the calculation are:
- What date was your stock issued? Anything issued on or before July 4, 2025 is stuck on the old $10 million/10x-basis, five-year-cliff system, even if you sell in 2028. The new tiers only apply to stock issued after that date. If you've done multiple rounds or exercised options at different times, you likely have QSBS tranches running under both systems simultaneously.
- What's your realistic exit gain? The exclusion only matters up to the cap. If your expected gain is well under $10-15 million, the pre- and post-2025 rules produce a similar outcome and the holding-period math matters more than the cap size.
- How close are you to a 3, 4, or 5-year mark on post-2025 stock? A sale six months before a tier boundary can cost you 25 percentage points of exclusion and push the remainder into the 28% bracket instead of standard capital gains rates.
What to do with these numbers
None of this replaces a conversation with a tax attorney who can look at your actual issuance dates and cap table. QSBS eligibility is fact-specific and unforgiving of assumptions. But walking into that conversation with your own rough numbers, run across both the old and new rules, changes what you're able to ask for. Most founders find out what their exclusion is worth after the sale closes. Run the math before you set a closing date, not after.