Federal QSBS tax breaks now phase in, and New York drops a plan to tax them
Federal exclusions for qualified small business stock now phase in over three to five years. New York's proposed change to them was withdrawn and left out of the May budget.
Qualified small business stock, or QSBS, is stock in a qualifying corporation that Section 1202 of the Internal Revenue Code can exclude from federal tax when it is sold. Founders, early employees and investors in young companies hold it. The One Big Beautiful Bill Act, signed in July 2025, changed the section's holding periods, dollar cap and asset test.
The federal rules now run on a sliding scale rather than a single five-year test. New York's treatment of the same gains was also in question in 2026. A proposal to tax those gains at the state level was advanced and then withdrawn, and the budget bill passed in late May does not include it, according to the sources reviewed for this article.
The sources describe the same cutoff in different ways: some say stock acquired or issued after July 4, 2025, others say on or after July 5, 2025, but these mark the same boundary. One source gives a signing date for the federal law that differs from the others; that is covered below.
A sliding holding period for newer stock
For stock acquired or issued after the cutoff, the excluded share of gain depends on how long the holder keeps the shares. Three years of holding excludes 50% of the gain. Four years excludes 75%. Five years or more excludes 100%, according to the statute as published by the Legal Information Institute at Cornell Law School.
Foley describes the change as a break from prior law, under which only a five-year hold qualified for the exclusion. Under the new tiers, a holder who sells before the five-year mark can receive a partial exclusion.
Stock issued before the cutoff keeps the five-year requirement, as Withum reports in its summary of the legislation. For stock under the new tiers, Withum notes that a seller who exits before five years no longer needs a Section 1045 rollover to receive a partial benefit.
The $15 million cap and the 10-times-basis alternative
The per-issuer limit on excludable gain rose from $10 million to $15 million for stock acquired after the cutoff. The cap is the greater of that dollar figure or 10 times the adjusted basis of the stock disposed of in the year, according to the statute.
The dollar limit is reduced by gain already excluded from the same issuer. Baker Tilly describes the same reduction, which applies to prior years. Withum notes that the limit stays at $15 million in total rather than rising to $25 million when a holder combines old and new stock. Once a holder reaches the cap, later inflation adjustments do not create further exclusion, Withum reports.
The 10-times-basis alternative can produce a larger cap for holders whose stock has a high adjusted basis. Baker Tilly states that, with the higher asset ceiling, the maximum potential exclusion rises to $750 million, up from $500 million. For taxpayers who file separately, Withum says the per-spouse limit is $7.5 million.
The $75 million asset test and inflation adjustments
A corporation qualifies as a small business for this purpose if its aggregate gross assets did not exceed $75 million before the stock was issued and do not exceed it immediately after. The previous ceiling was $50 million. Gross assets are measured as cash plus the adjusted basis of other property, according to the statute.
Both the asset ceiling and the $15 million figure are indexed for inflation for taxable years beginning after 2026, rounded to the nearest $10,000. Withum describes the first adjustment as taking effect in 2027. Baker Tilly says the higher ceiling may let more corporations qualify.
Baker Tilly also lists a change tied to research spending. It says qualifying research and experimental expenditures now include foreign costs under Section 174 and domestic costs under Section 174A. The change sits within its discussion of the active business requirement.
Which stock gets the new rules, and where sources differ
Baker Tilly says the One Big Beautiful Bill Act, Public Law 119-21, was signed on July 4, 2025. It states that stock acquired or issued on or before that date stays under prior law. It keys the holding-period and per-issuer changes to the acquisition date, and the asset test to the issuance date.
Withum describes the cutoff as stock issued on or after July 5, 2025, the same boundary as Baker Tilly's July 4, 2025 cutoff, since the statute applies the new rules to stock issued after the date of enactment. Foley also says the new rules apply to stock acquired or issued on or after July 5, 2025. Cullen LLP says the federal bill was signed on July 5, 2025; the statute's own notes, along with Withum and Baker Tilly, give the signing date as July 4, 2025.
Baker Tilly gives two transition examples. Stock acquired on April 1, 2025 and held for 4.5 years gets no exclusion because it was not held five years. If it is held five years or more, the cap is $10 million. Stock acquired on April 1, 2026 and held for 4.5 years qualifies for 75% of the gain, or $15 million in its example.
Withum also reports that companies may restructure to bring older stock under the new rules, but anti-abuse provisions apply. Redeeming old shares and reissuing new ones generally does not work, because the redemption rules block the new stock from qualifying.
“The federal rules now run on a sliding scale rather than a single five-year test.”
New York's current treatment and the proposed decoupling
Under current New York law, a resident, including a trust, is exempt from state income tax on proceeds from selling QSBS to the extent federal law exempts them, according to Loeb & Loeb. State treatment has therefore followed the federal exclusion.
In the Senate's one-house budget for fiscal 2026 to 2027, the state proposed decoupling from the federal exclusion. As proposed, the change would apply retroactively to January 1, 2025, according to Loeb & Loeb. Cullen LLP says state and city rates could reach over 14% on gains that were previously exempt. Loeb & Loeb does not state a proposed rate, so the Cullen figure is the only one in the sources reviewed.
Loeb & Loeb says the proposal was not yet final and was subject to negotiation with the Assembly until April 1, the deadline for presenting the final budget. It also describes a possible route for trusts through the exempt resident trust rules. Those rules, it says, require no New York fiduciaries, no New York-source income and no New York real or tangible property. Loeb & Loeb calls the rules complex and says planning must start well before any transaction.
Cullen reported on April 8, 2026 that lawmakers had advanced and then quickly withdrawn the proposal after criticism from the technology industry, and described the withdrawal as temporary. Oregon enacted its own decoupling in March 2026, according to the same source.
The budget bill the legislature approved on May 27, 2026 does not include the change. EY's tax alert lists decoupling from the federal QSBS changes among proposals considered but not part of the bill. The governor is expected to sign the bill, but the pages reviewed do not confirm a signature. EY says it will issue a further alert on the enacted legislation.
What the sources mean for readers
The sources describe the federal rules as layered. The statute sets the exclusion, with holding periods, a per-issuer cap and an asset test, and each element has its own date trigger. Baker Tilly notes that ambiguities remain and that failing one requirement can disqualify stock.
State law sits on top of that. Under current New York law, the state follows the federal exclusion for residents and trusts. The withdrawn proposal would have changed that, and EY's list of items considered but not included shows the QSBS change was not in the passed bill.
Baker Tilly also observes that founders may time new equity rounds to qualify beginning in 2026, and that the act did not limit existing QSBS strategies. Those observations come from the source's own analysis of the rules, and the sources reviewed do not extend them to any specific transaction.
