A new venture capital fund is bringing a powerful tax break back to the forefront, and founders should pay attention. On July 14, Goodfin unveiled a QSBS fund designed to help investors aim for a 0% federal capital gains rate on qualifying startup stocks. The launch builds on a rule that quietly became much more generous in 2025.
QSBS stands for qualified small business stock and can allow founders and early shareholders to exclude a large portion of their gains from federal taxes. For a young business creator, this difference can be life-changing upon leaving. So, understanding the rules early on, before you raise or incorporate a company, is one of the most cost-effective steps you can take. It goes naturally with intelligence seed funding in 2026 planning.
What is QSBS and why it exists
QSBS comes from Section 1202 of the Internal Revenue Code. Congress created it to reward people who invest money and years in small businesses. The deal is simple. Hold eligible stocks long enough and you can exclude much or all of the gain when you sell.
To qualify, the stock must be from a U.S. C corporation that meets a size test upon issuance. You must generally receive the shares directly from the company and not purchase them on a secondary market. The company must also run an active business rather than just hold investments.
Exclusion has always been valuable, but many founders ignore it. In fact, the advantage only appears years later, during the sale. Planning now protects a gain that seems distant today.
How the 2025 rules changed math
The One Big Beautiful Bill Act reshaped the QSBS for shares issued after July 4, 2025. The old rule required a five-year period for any exclusion. The new law adds a phased schedule, so partial relief comes sooner.
| Holding period | Federal gain excluded |
|---|---|
| 3 years | 50% |
| 4 years | 75% |
| 5 years or more | 100% |
Two other limits have also increased. The company size cap increased from $50 million to $75 million in gross assets. The exclusion cap per issuer increased from $10 million to $15 million, the highest, and it will be indexed for inflation after 2026. In short, more companies qualify and each shareholder can shelter more.
What this means for founders right now
Structure matters more than ever. QSBS only applies to C corporation stock, so founders running an LLC or S corporation may want to consider a conversion. Converting before a big funding round can lock in eligibility and start the clock early. This is the kind of compromise to model risk debt and choices regarding equity.
Timing and records are the other half. Note the exact date you receive your shares, as the levels depend on it. Maintain clear documentation showing that the company met the size test upon issuance. THE IRS ultimately decides whether a sale qualifies, so good documentation protects the benefits.
One caveat deserves attention. Not all states follow the federal rule, and a few still tax winnings. Check your treatment status before counting on taking a full break.
How to think about winning
Treat QSBS as a long game, not a flaw. The rule rewards manufacturers who stay the course, and the progressive schedule now eases the wait. Even a partial exclusion after three or four years can free up real money for your next venture. This option is also important if you ever explore how to buy a business down the road.
The practical approach is simple. Talk to a qualified tax advisor before your next incorporation or raise. A brief planning conversation today can protect millions of people later. Founders who learn these rules early tend to keep much more of what they build.
QSBS Frequently Asked Questions
Who is eligible for QSBS? Founders, employees and investors who hold eligible C corporation shares that they received upon initial issuance can claim them, subject to the holding period and monetary limits.
Does QSBS clear all taxes? No. It targets federal capital gains on qualifying stocks, and state rules vary. Other taxes and situations may still apply.
What is the quickest way to lose eligibility? It is common to own the wrong type of entity. QSBS requires C corporation stock, so an unconverted LLC will not qualify.
