IRC Section 1202 Update from Nick Pope

Earlier this year I wrote an article titled,  “IRC Section 1202: A Strategic Tax Advantage for Investors and Entrepreneurs” for Kiplinger Advisor Collective. The article focused on the unique and substantial tax benefits available through Internal Revenue Code (IRC) Section 1202. By investing in Qualified Small Business Stock (QSBS).; this provision allows individuals to exclude up to 100% of the capital gains realized from the sale of Qualified Small Business Stock (QSBS). Certain criteria must be met to qualify as a Section 1202 Stock. This blog post is an update to my original article that explores the eligibility criteria for QSBS, gain exclusion percentage, limitations, and strategic implications.  

This past summer, as the United States of America was celebrating its birthday, tax reform legislation was passed through the One Big, Beautiful Bill, Act. With nearly 1000 pages and over a hundred provisions The One, Big, Beautiful Bill has a significant effect on federal taxes, credits and deductions.

One such provision relates to Internal Revenue Code (IRC) Section 1202 and its eligibility requirements, gain exclusion percentage and limitations. The following changes apply to OSBS acquired after July 4, 2025. 

Gross Assets Limitation: At the time of issuance and immediately thereafter, the corporation's aggregate gross assets must not exceed $75 million, indexed for inflation. Previous gross assets must not exceed $50 million. 

Holding Period: The investor must hold the QSBS for more than three years (vrs. Five years) to be eligible for the capital gains exclusion. 

Exclusion Percentage: A tiered exclusion schedule was created rather than only excluding gain if held more than 5 years:

Years stock held | Applicable percentage 

3 years | 50 % 

4 years | 75 % 

5 years or more | 100 %

Exclusion Cap: For stock acquired on or before the applicable date: the limit remains $10,000,000, reduced by prior gains excluded under § 1202 for that issuer.

For stock acquired after the applicable date: the limit is $15,000,000, similarly reduced, with inflation adjustments in future years.

With the passage of The One Big, Beautiful Bill Act legislators continued to support investment into small business. The updated IRC Section 1202 continue to offer investors willing to commit to long-term investments in small businesses (QSBS) substantial tax benefits; now more small/startup c-Corp stockholders are eligible for the tax breaks. 

Check out the original article here.

-Nick Pope, CFP®, CEPA™, AEP®

Partner, Wealth Advisor