The numbers here are large enough to change your whole return. If you invest in a qualifying C corporation and later exit, you may exclude millions in capital gains from federal tax entirely. On a winning angel investment that's the difference between keeping nearly all of a multi-million-dollar gain and handing over 20%-plus to the IRS. It's frequently the single most valuable tax provision available to early-stage investors.
What trips people up now is that there are two versions of the rule running side by side, and the acquisition date decides which one you're on. The One Big Beautiful Bill Act rewrote Section 1202 for stock acquired after July 4, 2025: those shares get a staircase instead of a cliff — 50% of the gain excluded at three years, 75% at four, 100% at five — with the per-issuer cap raised from $10 million to $15 million and the company's gross assets ceiling raised from $50 million to $75 million. Anything you already held on July 4, 2025 stays on the old all-or-nothing five-year rule for the rest of its life, and you can't move an old position onto the new rules by exchanging it, so most angel portfolios built across 2025 now straddle both regimes. One caveat on the partial tiers: gain that qualifies but isn't excluded is taxed at 28%, not the usual 20% long-term rate, so a 50% exclusion cuts your bill by roughly a third rather than half.
The eligibility rules are strict either way. The company must be a domestic C corporation (not an LLC or S corp), under the asset ceiling at the time your stock was issued, and in a qualifying line of business. SAFEs and convertible notes are not stock yet, so the clock typically starts when they convert — a detail that catches a lot of investors off guard. The $15 million cap and the $75 million asset test are indexed to inflation starting in 2027; the old $10 million cap is not. Because the stakes are high and the rules unforgiving, QSBS is worth confirming with a tax advisor, and worth tracking acquisition dates carefully across every position so you don't accidentally sell at four years and eleven months. Note also that this is all federal: California doesn't conform to Section 1202 at all. This is general information, not tax advice.