VC Math 101: What's New With QSBS in 2025

August 19, 2025

By The Artemis Fund
The Artemis Fund believes technology can create prosperity for all. With offices in New York, Texas, Massachusetts, and Nevada, Artemis leads seed rounds for companies creating resilient families, individuals, and businesses across the US.
A once-obscure tax rule just got an upgrade, and it can save founders & investors millions of dollars.
With the passage of the One Big Beautiful Bill Act in July 2025, Qualified Small Business Stock (QSBS) isn’t just a long-term tax planning tool anymore. It’s a strategic unlock for earlier liquidity, bigger upside, and broader eligibility. Founders who understand it can dramatically improve their post-exit outcomes. Investors who use it can boost IRRs across their portfolio.

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What Changed in 2025
Under the One Big Beautiful Bill Act (OBBBA), signed into law on July 4, 2025, several enhancements were made to the QSBS program. These apply only to stock issued on or after July 5, 2025:
Eligibility Threshold Raised: The company asset cap was increased from $50M to $75M, allowing more companies to qualify.
Larger Tax Exclusion: The tax exclusion cap increased from $10M to $15M per shareholder (or 10x the investment), indexed for inflation starting in 2027.
Tiered Holding Periods Were Introduced:
50% tax exclusion after 3 years
75% tax exclusion after 4 years
100% tax exclusion after 5 years
These updates expand access and provide earlier liquidity options with meaningful tax advantages.
First Things First. In Order to Qualify, Your Company Must:
Be a C corporation (not an LLC or S corp).
Be based in the US.
Have less than $50M in assets when the stock is issued (or $75M for QSBS issued on or after July 5, 2025).
Use at least 80% of assets towards qualified trade or business activities.
Not be in any of the following categories: law, accounting, financial services, healthcare, engineering, consulting, athletics, performing arts, banking, financing, leasing, investing, farming, or hospitality.
Issue the stock directly from the corporation. Secondhand purchases aren’t eligible, but common and preferred stock can qualify.
What Are the Benefits of QSBS?
Up to 100% Tax Exclusion on Capital Gains: By holding QSBS for the required number of years, you can exclude up to $15M of capital gains (or 10x your investment) under the new law. This could save millions in taxes at the time of a stock sale.
Investor Appeal: QSBS also benefits investors, making your company more attractive to angels and VCs, and potentially improving funding opportunities.
Tax Savings at Exit: Avoiding significant capital gains taxes during an acquisition or IPO allows founders to reinvest more into future ventures or personal wealth.
Incentive for Long-Term Growth: QSBS encourages holding stock for multiple years, aligning with sustainable business building. Under OBBBA, even shorter holding periods offer partial exclusions.
Strategic Tax Planning: QSBS can complement other tax-planning strategies (like estate planning or stacking exclusions via trusts) to maximize financial benefits.
How To Actually Acquire QSBS
The process can be complicated, so it’s important to do your research and consult both legal and tax professionals. Here’s a high level overview:
Form a C corp: The state in which you incorporate your business can heavily influence regulatory compliance and your operational flexibility.
Conduct a financial review: Confirm that your business’ assets don’t exceed the threshold ($50M before July 5, 2025; $75M after).
Seek legal counsel: Engage a firm that specializes in securities law who can check for exemptions and prepare filings.
Create stock documentation: Draft Stock Purchase Agreements (SPAs) to outline terms of sale and ownership.
Gain board approval: Issuing stock must be approved by your board of directors.
Issue stock: Make sure to document this process thoroughly.
Monitor for compliance: You’ll need to conduct regular financial assessments to confirm your company’s asset value and ensure you continue to meet the QSBS qualifications.
QSBS in Action: What it Means for The Founder & The VC
Let’s look at an example. In 2025, Sarah founded CareTech Innovations, a C corporation focused on reducing the burden of care on women. At incorporation, the company met all QSBS requirements, including having less than $75M in assets and using 90% of its resources for active business operations.
Sarah issued herself 10,000 shares of stock at a nominal value. Meanwhile, a VC invested $1M in CareTech Innovations for 10% equity (1,000,000 shares, at $1/share). The VC also ensured that the investment qualified as QSBS under the new law.
Let’s fast forward to 2031. CareTech grew rapidly, and it was acquired by a major player in the femtech space for $100M.
Founder’s Outcome: The QSBS Advantage
Because Sarah held her QSBS for six years, she is eligible to exclude 100% of her capital gains from federal taxes. Assuming the acquisition value exceeds her cost basis, this means Sarah saves millions in taxes and can reinvest her proceeds into new ventures or personal goals without a significant tax burden.
Investor’s Outcome: Without QSBS vs. With QSBS
At the time of the exit, the VC’s 10% stake is now worth $10 million. The capital gains on this investment are $9 million ($10M exit value — $1M initial investment).
Scenario Without QSBS
Capital Gains Tax Rate: 20%
Tax Liability: $9M×0.20 = $1.8M
Net Proceeds: $9M−$1.8M = $7.2M
IRR Calculation (6-year horizon): Annualized IRR = 42% (based on $1M growing to $8.2M over 6 years).
Scenario With QSBS (100% Exclusion)
100% of $9M is excluded: $9.0M
Taxable Gain: $0
Net Proceeds: $9M
IRR Calculation (6-year horizon): Annualized IRR = 46.78% (based on $1M growing to $10M over 6 years).
By leveraging QSBS, the VC receives an additional $1.8M(!), boosting its IRR meaningfully. While the percentage increase may seem modest in this single example, the compounding effect of QSBS across a diversified portfolio of early-stage investments can significantly enhance fund-level returns over time.
What Else Do I Need to Know?
State Taxes are Something to Keep in Mind: The benefits of QSBS apply to your federal taxes, but state taxes can vary widely. It’s important to speak to a tax professional to understand the state level implications depending on where you incorporate.
Capital Loss: If the business fails, the QSBS loss is considered a capital loss, which will have its own set of tax rules and limitations.
Tax rate changes: The benefits of QSBS are tied to tax codes that can change at any time, so keeping an eye on legislation in terms of long term planning is a must.
By understanding the requirements and benefits of QSBS early in your entrepreneurial journey, you can position your company and your stock to maximize this unique opportunity. And while the process involves careful planning and ongoing compliance, the rewards are well worth the effort, especially for those committed to long-term growth, early strategic liquidity, and maximizing upside.
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