Tax Reconciliation Bill QSBS Changes for 2026: What Founders and Investors Must Know

Just when it seemed like QSBS couldn’t get any better, the tax reconciliation bill, (“Big Beautiful Bill”) signed into law on July 4, 2025, delivered a historic expansion of this powerful tax benefit. For startup founders, early employees, and investors, these updates could mean millions more in tax-free capital gains—as long as you plan ahead. 

Let’s break down the 2026 QSBS changes, who they apply to, and what moves you should be making now. 

A Quick Reminder, What Is QSBS? 

Qualified Small Business Stock (QSBS) refers to shares in eligible C-corporations that meet the criteria under Section 1202 of the Internal Revenue Code. When held for over five years, QSBS allows for up to 100% federal capital gains tax exclusion on up to $10 million in gains per issuer (or 10x basis, whichever is greater). 

The tax reconciliation bill’s 2026 changes make this benefit more flexible, more valuable, and more accessible. 

The Tax Reconciliation Bill’s Five Major QSBS Changes for 2026

1. Higher Exclusion Limits, More Tax-Free Gains

• Old Rule: $10 million capital gain exclusion per issuer
• New Rule (Starting in 2026): $15 million capital gain exclusion per issuer

This $5 million increase matters, especially for serial founders and investors with high-value exits. With proper equity planning and gifting strategies, it’s now even easier to stack exemptions across trusts and family members. 

2. Tiered Exclusion Based on Holding Period

Previously, QSBS required a full 5-year hold to access the 100% gain exclusion.

That’s still true for full exclusion, but now there’s room for earlier wins: 

• 3 years = 50% gain exclusion 
• 4 years = 75% gain exclusion 
• 5+ years = 100% exclusion 

This tiered structure gives founders and funds greater flexibility on exits and liquidity. If an acquirer comes calling in year 4, you’re not stuck choosing between selling or losing out on 100% tax exclusion—you’ll still walk away with substantial tax savings. 

This also aligns well with: 

• Shorter fund cycles 
• LP liquidity pressure
• Founder secondary transactions 

3. Expanded Eligibility for More Startups 

• Old Rule: Company must have <$50 million in gross assets at the time of stock issuance
• New Rule (Starting in 2026): Threshold raised to $75 million, and indexed to inflation

That means many later-stage startups, particularly those in a Series A or even Series B with still-moderate balance sheets, may now qualify for QSBS even if they wouldn’t have before. 

If you’re issuing new stock in 2026 or beyond, check carefully, your company may now qualify even if it didn’t previously. 

4. It’s Prospective Only

Important note: The tax reconciliation bill’s changes do not apply retroactively. Only stock issued after July 4, 2025 will be eligible for the new limits and holding period tiers. 

If you’ve already issued common or preferred stock before the bill’s enactment, those shares remain governed by the previous $10M limit and 5-year rule. 

5. Planning Opportunities for Founders and Investors 

If you’re a founder or fund manager, here’s how to act on the new rules: 

• Issue New Stock Strategically: Any stock issued post-enactment can qualify under the new rules. This could include founder equity, option grants, or shares issued in reorganizations. 
• Stack Smart: Trust-based “stacking” is still legal and viable, now with a bigger per-person cap. Multiple trusts = multiple $15M exemptions. 
• Model Liquidity Scenarios: Founders can now structure secondaries and early exits more flexibly without losing QSBS advantages. 
• Flag Legacy Equity: Cap tables should distinguish clearly between pre- and post-July 2025 issuances for compliance and planning. 
• Talk to a Tax Advisor: These are nuanced rules with major implications—planning early means keeping more post-exit value. 

Let’s Talk About Your QSBS Strategy

With these new updates in effect, planning around QSBS is more valuable—and more complicated—than ever. If you’re a founder, fund manager, or early-stage employee, now’s the time to rethink your equity structure and make sure you’re positioned to capture the full benefit.