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 Qualified Small Business Stock (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). 

Depending on your state, you may get additional benefits too (though some states, like California, don’t conform). 

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

What Makes Stock “Qualified”?

QSBS isn’t something you can file for retroactively. If your company is growing and a future exit is on the horizon, now is the time to make sure your equity qualifies.

To be QSBS, your shares must meet a few requirements at the time they’re issued: 

• C-Corporation: The company must be a U.S. C-corp when stock is issued. 
• Gross Assets: The company must have less than $75 million in gross assets when the stock is issued. 
• Qualified Business: The company must be actively operating and not in an excluded industry (like finance, real estate, or professional services). 
• Original Issuance: You must receive the stock directly from the company, not through a secondary purchase.

The Tax Reconciliation Bill’s Major QSBS Changes for 2026

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. 

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 

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. 

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. 

How Founders & Investors Can Benefit From 2026 QSBS Changes

Founders, fund managers, and investors are in a unique position to benefit from QSBS—especially if they know how to plan around it.

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. 

Structure as a C-Corp Early 

Most U.S. startups raising VC funding are already structured this way. If you’re operating as an LLC, switching to a C-corp may unlock QSBS for future stock grants. 

Document Stock Issuance Dates 

To claim QSBS, you’ll need to know the exact issuance date of your stock. Make sure this is well-documented—especially in reorganizations or 83(b) elections. 

Track Eligibility Across Rounds 

Not all shares are created equal. Some may qualify, others may not. 

Keep clean records showing: 

• Gross asset level at time of issuance 
• Business activity 
• Stock class and grant docs 

Use Gifting Strategies to Multiply Benefits 

You can “stack” the QSBS exemption by gifting stock to trusts or family members—each of whom may qualify for a separate $15 million exclusion. Timing and documentation are critical, though, so work with a tax advisor. 

Consider Early Exits

With the new tiered exclusion rules, selling after just three or four years may still give you meaningful tax savings. If your company receives acquisition interest before year five, you now have more flexibility.

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. 

Want help determining whether your shares qualify—or how to structure your next round to take full advantage? 

Let’s make sure your exit is as tax-efficient as it is life-changing.