Section 1202 Gain Exclusion Now Has a $15 Million Cap and Three Holding-Period Tiers

Section 1202 of the Internal Revenue Code lets non-corporate owners of qualified small business stock exclude part or all of the gain when they sell it. The exclusion depends on the issuing company’s size, its business activity and how long the owner holds the shares. Public Law 119-21, the One Big Beautiful Bill Act, changed several of those figures in July 2025.

Under the amended statute, the gross asset limit and the per-issuer cap both rise, and the holding period can now be met in stages. Kutak Rock and Foley both summarize these changes, and the statute text published by the Legal Information Institute at Cornell Law School sets out the figures. The dollar amounts match across the three sources. Where the start dates differ, the sections below give the date each source uses.

Which Companies Meet the Size and Activity Tests

The issuing company must pass a size test and an activity test. The size test looks at aggregate gross assets. Kutak Rock says the limit rose from $50 million to $75 million under the 2025 law.

Kutak Rock says the rules apply only to stock of domestic C corporations, and Foley says the company must still be taxed as a C corporation. Foley also says the taxpayer must buy the stock directly from the company. Foley says the company generally cannot redeem more than a de minimis amount of its stock within a two-year window that begins one year before the issuance. Cornell’s text instead says stock is not qualified if, at any time during the 4-year period beginning two years before the issuance, the company purchased its stock from the taxpayer or a related person.

The activity test requires at least 80 percent, by value, of the company’s assets to be used in the active conduct of one or more qualified trades or businesses. Cornell’s text leaves several fields out of that definition. They include health, law, engineering, architecture, accounting, actuarial science, consulting, performing arts, athletics, financial services and brokerage services. The list also covers banking, insurance, financing, leasing, investing, farming, certain extraction businesses, and operating a hotel, motel or restaurant.

A business is also excluded when its principal asset is the reputation or skill of one or more of its employees.

Cornell’s text shows no 2025 change to the 80 percent test or to the list of excluded fields. Foley says the 2025 law left the other qualification requirements unchanged, including the requirement to run a qualifying trade or business. Foley says that requirement generally excludes service businesses.

Per-Issuer Cap
Kutak Rock gives the cap as $15 million or 10 times the aggregate adjusted basis of the stock, whichever is greater, with inflation indexing starting in 2027.

Testing the Gross Asset Limit at Issuance

For stock issued after enactment, the $75 million limit applies both before and immediately after the stock is issued. Under the statute text, the assets must not exceed the limit at all times before the issuance and immediately after it.

Foley describes the earlier $50 million limit as including the proceeds from the stock issuance itself. Kutak Rock describes the measure as aggregate gross assets on a cash and tax basis.

Cornell’s note says the $75 million figure and the inflation provisions apply to stock issued after the date of enactment. Kutak Rock gives the trigger as stock issued or acquired on or after enactment, and dates enactment to July 4, 2025.

Foley says the threshold is adjusted for inflation after 2026. Kutak Rock says indexing of the $75 million threshold begins in 2027.

How the $15 Million Cap Is Calculated

The cap on excludable gain is the greater of a dollar limit or 10 times the aggregate adjusted basis of the qualified stock. Kutak Rock describes the cap as a per-taxpayer, per-issuer limit. Cornell’s text starts the dollar limit at $15 million for stock acquired after the applicable date. It reduces that figure by prior-year eligible gain from the same issuer, and by current-year gain from that issuer on pre-applicable-date stock.

When 10 times the aggregate adjusted basis is larger than $15 million, that larger amount becomes the cap. Owners with holdings in more than one company measure the cap separately for each issuer.

Cornell’s text lowers the $10 million figure to $5 million for married taxpayers filing separately, and halves the post-applicable-date amount as well. It also provides that once eligible gain from an issuer’s post-applicable-date stock exceeds the limit, the limit for later years is zero.

Foley says the figure was $10 million before the change, and the new $15 million is only a baseline for 2025 and 2026. Kutak Rock places the start of indexing in 2027. Cornell’s text applies the inflation adjustment to taxable years beginning after 2026, using the 2025 cost-of-living adjustment and rounding to the nearest $10,000.

The exclusion depends on the issuing company’s size, its business activity and how long the owner holds the shares.

Holding Periods Shift From One Test to Three Tiers

Foley says that a full exclusion for stock bought before July 5, 2025 required holding it at least five years. It adds that, absent a Section 1045 rollover, a sale before the five-year holding period is met would make all the gain taxable. Under the amended statute, Cornell’s text and Kutak Rock’s summary both give three tiers. Gain is 50 percent excludable after three years, 75 percent after four years and 100 percent after five years.

The tiers apply to the length of time the owner has held the shares. An owner who sells after three years but before four would, under these figures, exclude 50 percent of the gain. Cornell’s text places the percentages in subsection (a) of the statute.

Cornell’s text also sets separate percentages for older stock, based on acquisition date. Stock acquired after Feb. 17, 2009 and on or before Sept. 27, 2010 gets a 75 percent exclusion. Stock acquired after Sept. 27, 2010 and on or before the applicable date gets 100 percent. The holding period runs from the first day the taxpayer held the stock, applying section 1223.

The start date for the tiers is where the sources differ. Cornell’s text defines the applicable date as the date of enactment of that paragraph, which its note gives as July 4, 2025. Kutak Rock applies the new rules to stock issued or acquired on or after that date. Foley gives July 5, 2025 as the date for stock issued on or after that day. Cornell’s amendment note for the holding-period change refers to taxable years beginning after July 4, 2025.

Which Stock Falls Under the New Figures

Kutak Rock ties the new rules to stock issued or acquired on or after enactment. Cornell’s note for the asset-limit and cap-inflation changes uses the wording stock issued after the date of enactment.

Foley describes the earlier rules as a $10 million cap and a full five-year holding period. Cornell’s text sets a $10 million limit for pre-applicable-date stock and a $15 million limit for stock after it. Stock acquired on different dates can therefore fall under different figures, and Kutak Rock’s on-or-after wording would put stock acquired on July 4, 2025 under the new rules, while Cornell’s text places it under the earlier $10 million limit.

According to Cornell’s text, the asset-limit and cap-inflation amendments apply to stock issued after July 4, 2025, while the holding-period and per-issuer limit amendments apply to taxable years beginning after that date. Kutak Rock says IRS and/or Treasury guidance on the changes, including to Section 1202, may follow.