Pre vs post-OBBBA §1202 — three independent rule-set changes

The three dimensions OBBBA changed

Three §1202 mechanics shifted simultaneously for stock issued after 2025-07-04 under P.L. 119-21 §70431:

1. Tiered exclusion replaces the binary 5-year rule (P.L. 119-21 §70431(a)(1)-(3), per Cornell LII amendment footnote; primary-source confirmation against the bill text pending). Post-OBBBA stock earns 50% federal exclusion at a 3-year hold, 75% at 4 years, and the original 100% at 5+ years. The unexcluded slice of any partial-tier exit is taxed at the §1202(a) 28% rate, not the 15%/20% LTCG schedule. See the 5-year holding period pillar for tier mechanics.
2. Per-issuer cap raised from $10M to $15M(P.L. 119-21 §70431(a)(4)(B), per Cornell LII amendment footnote; primary-source confirmation pending), with annual inflation indexing starting TY2027 (methodology to be specified by Treasury guidance; modern federal indexing typically applies the §1(f)(3) chained-CPI approach). The cap is still the greater of the statutory dollar figure OR 10× the taxpayer's basis at issuance — that part is unchanged. The cap-arithmetic pillar walks the math.
3. Aggregate gross-asset ceiling at issuance raised from $50M to $75M (P.L. 119-21 §70431(a)(5), per Cornell LII amendment footnote; primary-source confirmation pending). This is the §1202(d)(1) test that decides whether the issuer ever qualified as a QSBS issuer. Raising it by 50% expanded the eligible- issuer universe meaningfully and brings several previously borderline Series A and early Series B issuers into the §1202 perimeter.

The cutover line is issuance, not sale

The single most-confused mechanic: which rule set applies follows the issuance date, not the sale date. Stock acquired on 2025-06-30 lives under the pre-OBBBA rules forever — even if sold in 2031. Stock acquired on 2025-07-05 lives under the post-OBBBA rules forever — including the new tiered exclusion and the new $15M cap. Congress wrote the effective-date language this way to protect the settled expectations of pre-OBBBA holders, and the pre vs post-OBBBA issuance pillar unpacks the boundary cases (recapitalizations, §351 contributions, §368 reorganizations).

Three worked examples — pre, post, mixed

Example 1 — pre-OBBBA founder (binary rule). Founder F1 received QSBS on 2024-03-15 at a $0 basis (incorporation lot). Sells 2029-04-01 for $9M gain.

• Hold years = (2029-04-01 − 2024-03-15) / 365.25 ≈ 5.05 — satisfies §1202(a)(4) 5-year hold.
• Cap = greater of $10M (pre-OBBBA fixed) OR 10 × $0 basis = $10M.
• In-cap gain = $9M; over-cap gain = $0.
• Exclusion = 100% × $9M = $9M excluded; federal tax = $0 on the §1202 slice.
• State-conformity overlay applies (see California for a decoupled-state contrast — CA Rev. & Tax. Code §17131 doesn't conform, so the entire $9M is California-taxable).

Example 2 — post-OBBBA founder, 4-year exit. Founder F2 received QSBS on 2025-09-01 at a $0 basis. Sells 2029-10-15 for $4M gain.

• Hold years = (2029-10-15 − 2025-09-01) / 365.25 ≈ 4.12 — hits the post-OBBBA 4-year tier per P.L. 119-21 §70431(a)(2).
• Cap = greater of $15M (post-OBBBA fixed) OR 10 × $0 basis = $15M.
• In-cap gain = $4M; over-cap gain = $0.
• Exclusion = 75% × $4M = $3M excluded.
• Unexcluded slice = $1M × 28% §1202(a) rate = $280,000 federal (plus 3.8% NIIT on the unexcluded slice under §1411 if applicable: +$38,000).
• If F2 had held one more year to the 5-year tier, federal tax on the §1202 slice would drop to $0. The marginal value of the last year of hold is the entire $280k–$318k.

Example 3 — mixed portfolio. Angel A holds two lots in Acme Inc.: Lot α issued 2025-04-01 (pre-OBBBA, $1M basis), Lot β issued 2026-02-01 (post-OBBBA, $500k basis). Both sold 2031-06-01 for $9M gain on α and $7M gain on β.

• Lot α: hold ≈ 6.17y > 5y. Cap = max($10M, 10 × $1M = $10M) = $10M. Gain $9M is in-cap. Exclusion 100% (pre-OBBBA §1202(a)(4)). Federal §1202 tax = $0.
• Lot β: hold ≈ 5.33y > 5y. Cap = max($15M, 10 × $500k = $5M) = $15M. Gain $7M is in-cap. Exclusion 100% (post-OBBBA §70431(a)(3) full tier). Federal §1202 tax = $0.
• The §1202(b)(1) per-issuer aggregation applies separately to each lot's rule set. Both lots clear comfortably under their respective caps; no over-cap LTCG.

Run any of these scenarios in the decoder to verify the arithmetic; the decoder reads the issuance date you input, picks the rule set deterministically (anything strictly after 2025-07-04 = post-OBBBA), and applies the right cap, ceiling, and tier table.

Pre-OBBBA snapshot — what stayed

• Exclusion: 100% at 5+ year hold under §1202(a)(4); otherwise none from §1202 (consider a §1045 rollover instead).
• Per-issuer cap: greater of $10M or 10× basis under §1202(b)(1).
• Gross-asset ceiling at issuance: $50M aggregate under §1202(d)(1).
• State conformity:same heterogeneous landscape — California decouples under Cal. Rev. & Tax. Code §17131, PA and other partial-conformity states add back to varying degrees, most other states conform. See the 50-state grid for the full conformity map.

Post-OBBBA snapshot — what changed

• Exclusion: 50% at 3y / 75% at 4y / 100% at 5y+ under P.L. 119-21 §70431(a)(1)-(3). The unexcluded slice is taxed at 28% under §1202(a).
• Per-issuer cap: greater of $15M or 10× basis (P.L. 119-21 §70431(a)(4)(B)), indexed for inflation annually starting TY2027 (methodology to be specified by Treasury guidance; modern federal indexing typically applies the §1(f)(3) chained-CPI approach). The 2027 indexed figure is not yet published as of 2026-05-11.
• Gross-asset ceiling at issuance: $75M aggregate under §1202(d)(1) as amended by P.L. 119-21 §70431(a)(5).
• State conformity: unchanged at the federal level — but watch for state legislatures revising in response to OBBBA. Annual review needed; see the state conformity grid.

What OBBBA did NOT change

The amendments are surgical. The unchanged portions of §1202 include:

• §1202(c) — original-issuance test. Stock still must be acquired by the taxpayer at original issuance from the corporation in exchange for money, property (other than stock), or services. Secondary-market purchases are still disqualified.
• §1202(d) — qualified-small-business definition. Still a domestic C-corp, still subject to the eligible-corporation tests, still excludes the ineligible §1202(e)(3) trades (services, banking, farming, mining, hotels, restaurants). OBBBA changed only the §1202(d)(1) gross-asset ceiling.
• §1202(e) — active-business requirement.At least 80% of the corporation's assets must be used in a qualified trade or business at all times during substantially all of the taxpayer's holding period. Unchanged.
• §1202(h) — tacked holding period.§351 transfers, §368 reorganizations, §1041 spousal transfers, and inheritance still tack the holding period (§1202(h)(2)). Gifts also tack basis and holding period under §1015. S-to-C conversions retain the §1202(h)(4) treatment — the conversion does not reset the §1202 clock, but the pre-conversion S-corp period also doesn't count toward the 5-year tier.
• §1202(g) — pass-through entity treatment (including RICs). Pass-thru entities — partnerships, S corps, regulated investment companies, and common trust funds — can still pass §1202 character through to their owners, with the underlying holding period applied at the entity level. (§1202(f) is the separate stock-conversion rule, not the pass-through rule.)
• Treas. Reg. §1.1202-2 — redemption disqualification.The de-minimis test still disqualifies QSBS if aggregate redemptions exceed both $10,000 AND 2% of the taxpayer-held stock during the 4-year window centered on the issuance. OBBBA didn't touch this trap.
• AMT preference treatment under TCJA. The Tax Cuts and Jobs Act (P.L. 115-97, effective 2018) permanently removed §1202 gain as an AMT preference under §57(a)(7); OBBBA did not reinstate it. This is a frequent source of confusion because pre-2010 §1202 partial exclusions (50%/75% tiers under the original statute) had a 7% AMT add-back. That add-back is gone for all post-TCJA years and remains gone under OBBBA. See the methodology page for the §1202-AMT timeline.

Why the rate matters more than the exclusion percentage

A common misread: "75% at 4 years sounds great." But the 25% slice of the gain that's NOT excluded is taxed at 28%under §1202(a)'s reference into §1(h)(4) — not the 20% top LTCG rate plus 3.8% NIIT (~23.8% all-in). At a $4M gain, the 4-year-tier math is: $3M excluded, $1M unexcluded × 28% = $280,000 federal, before NIIT. The 5+ year hold gets you $0 federal. The hold-period premium is real and statutory.

Practitioners frequently default to the LTCG schedule because Form 8949 routes the §1202 sale into Schedule D Part II (long-term capital gain) under §1202(a)'s holding- period treatment. The 28% rate is then applied via the Schedule D 28% Rate Gain Worksheet on line 18. If you skip the worksheet you under-tax the unexcluded slice by ~8 percentage points and create a notice exposure. See the Form 8949 walkthrough for the full filing path.

Interaction with adjacent provisions

• §1202 vs §1045.§1045 lets you defer gain on QSBS sold under 5 years by rolling proceeds into replacement QSBS within 60 days. After OBBBA, a §1045 rollover can land in either rule set depending on the replacement's issuance date — and the replacement's tacked holding period (under §1045(b)(4), which routes through §1223 via §1045(b)(5)) preserves the original §1202 hold for the cap-and-tier test. See the §1045 pillar.
• §1202 vs §1244. §1244 covers the opposite outcome — when the QSBS position goes to a loss. Up to $50,000 (single) / $100,000 (MFJ) of the loss can be taken as an ordinary loss under §1244(b). §1202 is unavailable on a loss because §1202 only excludes gain. The two provisions are mutually exclusive at the share-lot level. See the §1244 pillar.
• §1202 vs ISO/RSU exercise. An ISO exercise produces ordinary compensation income (or AMT preference under §56(b)(3)), and the resulting share is held at exercise basis. The §1202 holding-period clock starts on the share- issuance date for option-acquired stock — which for an ISO is the exercise date, not the grant date. The same is true for RSU vesting (issuance date = vesting/ settlement date for §1202 purposes per §1202(c)(1)).
• §1202 + §83(b).An early option exercise paired with a timely §83(b) election under §83(b)(1)(B) starts the §1202 clock at the exercise date, even though full vesting is years out. This is the founder's favorite §1202 hold- period accelerator. Keep the stamped §83(b) copy in the records — it is the primary evidence of the clock-start date.
• §1202 vs §1014 step-up at death.Inherited QSBS receives a §1014 basis step-up but the §1202(h)(2)(B) tacked-period treatment carries the original holding period to the heir. The heir can therefore qualify under §1202 immediately at the decedent's tacked hold — but the basis is reset to fair market value at death, which often makes the 10×-basis cap path dominate over the $10M/$15M fixed cap. Practitioners frequently miss the basis-reset interaction with the cap.

Documentation to retain

The substantiation burden for a §1202 exclusion sits on the taxpayer. At minimum, retain:

• Stock-purchase agreement or subscription agreement showing the issuance date, share count, and basis. The issuance date is the §1202(c)(1) clock anchor and the OBBBA rule-set anchor.
• §83(b) election copy with IRS-stamped receipt if early exercise applied. §1.83-2(c) requires the election within 30 days of transfer; the stamp is your proof of timely filing.
• Issuer financial statements at issuance establishing the §1202(d)(1) gross-asset ceiling test was met — $50M for pre-OBBBA, $75M for post-OBBBA. A cap-table snapshot plus the balance sheet on the issuance date is the standard substantiation package.
• Active-business attestation.§1202(e) requires 80%+ of corporate assets in a qualified trade or business throughout substantially all of the taxpayer's holding period. A series of annual board-attested representations covering the hold period is the practitioner-standard substantiation.
• Sale documentation showing proceeds, date, and counterparty.
• §1045 election statement if rollover applied, per the §1045 election-statement requirements under Treas. Reg. §1.1045-1 (final regulations published 2007, which largely superseded Rev. Proc. 98-48) — attached to the return for the year of the original sale.

State conformity bridge

Federal §1202 treatment is only half the picture. The states that decouple or partially decouple from §1202 reshape the after-tax outcome materially. The most- affected states for founder concentration:

• California— full decoupling under Cal. Rev. & Tax. Code §17131; California treats §1202 gain as ordinary California income at the 13.3% top rate (12.3% + 1% mental-health surcharge). The entire excluded portion of a $5M federal exclusion is California-taxable.
• Pennsylvania — partial conformity at the PA personal-income-tax level (3.07% flat); PA does not adopt federal §1202 but treats QSBS sales as net gain from sale of property, which generates a state-level tax on what the federal return excluded.
• New Jersey — partial decoupling; NJ-1040 Schedule B requires the gain be included even when federally excluded.
• Texas — no state personal income tax, so the federal exclusion is the whole picture.

The full 50-state matrix with conformity tier (full / partial / decouple / no-tax) and source URL lives at /states. Each state row links to a per-state detail page with the state code section, the state-return line for the QSBS entry, and the residency-test note for relocators planning a pre-exit move.

What the decoder does with the cutover

The QSBSCalc decoder reads the issuance date you input, picks the rule set deterministically (anything strictly after 2025-07-04 = post-OBBBA), and applies the right cap, ceiling, and tier table. The OBBBA flag is surfaced on every per-issuance result card. The portfolio aggregate shows whether your mix of pre/post issuance is meaningfully tax-asymmetric — which is the real planning insight for founders considering when to exercise replacement-grant options or how to stage a multi-tranche exit.

The decoder runs entirely in-browser; nothing is sent to a server. The math is deterministic from the inputs you provide, the rule-set rules described above, and the state-conformity row for your residency state. The methodology page documents every formula and every primary source; the sources page enumerates the Cornell LII, eCFR, congress.gov, and irs.gov citations used. For reviewer credentials and the editorial process, see the about page.

Informational, not tax advice. Consult a CPA or Enrolled Agent before acting on a corrective distribution.