At Veritas Global, we closely monitor legislative changes that impact startup formation, early-stage fundraising, and long-term equity planning. In this article, we examine the latest Qualified Small Business Stock (QSBS) reform proposals under the Small Business Investment Act of 2025 and how they could reshape planning strategies for both founders and investors.
This is a follow-up to our earlier deep dive: The Small Business Investment Act of 2025: A Game-Changer for Entrepreneurs & Investors↗.
These reforms aren’t isolated—they’re part of the broader tax and innovation push inside the “One Big Beautiful Bill” (H.R. 1), the most ambitious tax modernization and pro-growth legislation since the Tax Cuts and Jobs Act. Within this framework, QSBS expansion aims to make America the best place to build and back startups.
Key Takeaways from the 2025 QSBS Expansion Proposal
The original QSBS rules under Section 1202 of the Internal Revenue Code allowed for up to 100% exclusion of capital gains on the sale of qualified stock held for five years, up to a $10 million or 10x basis cap. The new proposals under the Small Business Investment Act of 2025 build on this foundation in several key ways:
1. Expanded Eligible Company Types
The proposed legislation broadens the types of businesses that can qualify for QSBS treatment. Historically, many service-based companies (e.g., law, finance, healthcare) were excluded. The 2025 expansion opens the door to a wider range of tech-enabled, service-driven startups, including many that previously fell outside of Section 1202 eligibility.
This change reflects the reality of modern startup ecosystems and could dramatically increase the number of companies whose stock qualifies.
However, businesses primarily engaged in asset management, real estate development, or those operating as passive investment vehicles are still excluded under Section 1202 and remain ineligible for QSBS, even with the 2025 reforms.
2. Increased Employee Ownership Incentives
The proposal encourages broader employee ownership by providing special carveouts for equity awards such as stock options and RSUs, enabling holders to benefit from QSBS treatment under clearer rules.
This aligns with the broader national focus on wealth creation through equity and ensures startup teams—not just founders or early investors—can share in the upside under tax-advantaged conditions.
Example: An early-stage investor puts $1M into a qualified C-corp startup in 2025. Five years later, their shares are acquired for $12M. Thanks to QSBS, up to $10M of capital gains is fully exempt from federal tax—saving ~$2M in taxes, depending on the investor’s marginal rate.
3. State-Level Harmonization and Portability
One of the most founder-friendly additions is a proposed federal preemption mechanism that simplifies and overrides inconsistent state-level QSBS interpretations. This means companies incorporated in or operating across multiple states will have a unified federal standard, streamlining compliance and boosting investor confidence.
4. Deeper Record-Keeping and Compliance Requirements
With expanded eligibility comes stricter documentation obligations. The legislation outlines more robust compliance mandates, especially around:
- Stock issuance and fair market value determination at time of grant
- Entity-level certifications
- Retention of eligibility logs for IRS review
Founders will need to work closely with legal and tax advisors to ensure compliance is bulletproof from day one.
5. Transition Relief and Grandfathering
Companies that issued QSBS-eligible stock under the old rules will continue to benefit from existing protections. However, the proposed legislation also includes transition rules to help founders and investors navigate the shift into the new regime without adverse tax consequences.
Why This Matters Now
The 2025 expansion of QSBS reflects a broader policy goal: democratizing startup wealth and incentivizing innovation across more sectors. With a potential sunset of the original QSBS provisions always looming in tax negotiations, this reform seeks to provide both certainty and broader applicability.
For founders and early-stage investors, this means re-evaluating:
- Entity type and cap table structure
- Stock grant timing and eligibility tracking
- Investment structuring through SAFEs, convertible notes, or direct equity
For venture investors, these updates are a boon. Broader eligibility means a larger share of their early-stage portfolio companies may qualify for tax-free exits. Firms should assess which of their existing and pipeline companies could benefit, and update LP communications and fund modeling accordingly.
Final Thoughts
If enacted, the 2025 changes to QSBS could unlock new levels of tax-advantaged growth for startups and their stakeholders. But to benefit, companies must structure carefully from the outset.
At Veritas Global, we help founders and VCs navigate QSBS eligibility, fundraising strategy, and compliance across every stage of the startup lifecycle.
Contact us to structure your next round for tax efficiency—and future upside.
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