Trump administration criticizes rapid expansion of tax break for founders and investors

A tax provision that lets startup founders and early investors shield millions in capital gains from the IRS is growing fast, and it’s catching heat from an unlikely direction: the administration that just made it more generous.

The Qualified Small Business Stock (QSBS) exclusion, buried in Section 1202 of the Internal Revenue Code, has quietly become one of the most powerful wealth-building tools in the startup ecosystem. It allows qualifying investors to exclude up to 100% of their long-term capital gains when selling stock in small C corporations, provided they’ve held the shares for at least five years.

A tax break that just got bigger

The One Big Beautiful Bill Act, signed by President Trump on July 4, 2025, expanded QSBS benefits. The new law raised the exclusion cap to the greater of $15 million or 10 times the investor’s adjusted basis, up from the previous $10 million ceiling. The $15 million figure will also be inflation-adjusted starting in 2026.

The provision dates back to 1993, when it was first introduced to encourage investment in small businesses. The 100% exclusion rate that exists today was established in 2010. Before that, only 50% to 75% of gains qualified for the exclusion.

Who actually benefits

Treasury analysis indicates that three-fourths of QSBS gains accrue to individuals with incomes exceeding $1 million.

The expanded QSBS provision is expected to substantially increase federal costs. At the state level, the impact is projected to reach hundreds of millions in annual revenue losses as state governments wrestle with whether to conform to the new federal tax landscape or carve out their own rules.

The Tax Foundation and the Institute on Taxation and Economic Policy have each raised concerns about the provision. The Tax Foundation has focused on neutrality and simplicity issues, while ITEP has zeroed in on the regressivity of a benefit that primarily serves high-income taxpayers.

What this means for investors

To qualify, stock must be in a domestic C corporation with gross assets under $50 million at the time of issuance, and the investor must hold for at least five years. These requirements explain why the benefit has remained largely irrelevant to crypto-native financial structures. QSBS applies to traditional equity in C corporations, not tokens, not DAOs, not most of the instruments that define Web3 investing.

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