On June 16, 2025, the Senate Finance Committee released draft text of the tax provisions in the Senate’s version of H.R. 1 (commonly referred to as the “One Big Beautiful Bill” (the SFC Bill)).¹ Notably, the SFC Bill would significantly expand the “qualified small business stock” (QSBS) tax exemption under Section 1202² for stock acquired³ after the enactment date of the final legislation (the Effective Date).

The QSBS tax exemption allows noncorporate founders and investors in certain emerging growth companies to potentially exclude up to 100 percent of the U.S. federal capital gains tax incurred when selling its stake in the start-up or small business (subject to a cap and holding period restrictions), and is intended to encourage formation of and investment in certain small active operating businesses. Enacting the proposed changes would materially increase the available tax benefits for stock issued after the Effective Date.

The SFC Bill proposes the following changes for stock acquired after the Effective Date.

Phased-In Gain Exclusion

• Current Law: Gain from the sale of QSBS acquired after September 27, 2010, is eligible for 100-percent exclusion from U.S. federal capital gains tax if it is held for more than five years (subject to a cap).
• Senate Proposal: The SFC Bill replaces the strict five-year cliff for gain exclusion with a phase-in approach. QSBS held for at least three years would be eligible for 50-percent gain exclusion, and QSBS held for at least four years would be eligible for 75-percent gain exclusion. Because QSBS-eligible gain is subject to tax at a 28 percent tax rate (rather than the default 20 percent capital gains rate), the effective rate would be 14 percent and seven percent, respectively. QSBS held for more than five years would continue to be eligible for the 100-percent gain exclusion.⁴

Increased Cap on Gain Exclusion

• Current Law: The aggregate amount of “eligible gain” that can be excluded is subject to a per-issuer cap. Specifically, each taxpayer that holds QSBS-eligible stock in a company can exclude from capital gain the greater of i) $10 million (the Dollar Threshold) or ii) 10 times the aggregate adjusted bases of QSBS disposed of by the taxpayer. For married taxpayers filing separately, the Dollar Threshold is reduced to $5 million.
• Senate Proposal: The SFC Bill increases the Dollar Threshold to $15 million (or $10 million for married taxpayers filing separately). The Dollar Threshold would also be indexed for inflation annually beginning in 2026.

Increase in Aggregate Gross Assets Threshold

• Current Law: In order for stock to be QSBS eligible, the small business’s aggregate gross assets⁵ from inception to immediately after the issuance of such stock (including proceeds received in exchange for the stock) cannot at any time exceed $50,000,000.
• Senate Proposal: The SFC Bill increases this threshold to $75,000,000. The threshold would be indexed for inflation beginning in 2026.

Of note, the cap on gain exclusion and the aggregate gross assets threshold have not been increased since Section 1202 was originally enacted in 1993. The proposed changes provide the most significant expansion in QSBS benefits since 2010, but as drafted are only available for stock issued (or treated as issued) after the Enactment Date. Companies, investors, and founders should consider the potential impact of the proposed legislation on any QSBS-eligible stock and the timing of such issuances.

Please contact Wilson Sonsini attorneys Myra Sutanto Shen, Greg Broome, Derek Wallace, Jonathan Zhu, or any other member of the firm’s Tax practice to discuss the potential implications of the SFC Bill.

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[1] For prior coverage of H.R. 1, please see https://www.wsgr.com/en/insights/the-one-big-beautiful-bill-extending-the-tcja-and-curtailing-the-ira.html.

[2] All Section references are to the Internal Revenue Code of 1986, as amended, as of June 17, 2025. For more information about QSBS, please see our Advisory: https://www.wsgr.com/en/insights/understanding-section-1202-the-qualified-small-business-stock-exemption.html.

[3] For QSBS purposes, stock is treated as issued on the date the holding period begins (as determined under Section 1223), even if the stock has not yet been issued. Therefore, if stock is treated as issued acquired prior to the Effective Date (because, for example, it was issued for property in tax-free exchange), the proposed changes will not apply even if such stock is issued after the Effective Date.

[4] The text of the SFC Bill suggests that QSBS held for exactly five years would also be eligible for 100 percent exclusion. 

[5] “Aggregate gross assets” means the amount of cash and the adjusted tax bases of other property held by the issuing corporation (taking into account certain attribution and look-through rules). For this purpose, the adjusted tax basis of property contributed to the issuing corporation is its fair market value at the time of contribution.