The “One Big, Beautiful Bill” (OBBB), signed into law on July 4, 2025, made several changes to U.S. tax law that affect startup employees, early investors, and equity holders. The QSBS provisions apply to stock issued after July 4, 2025, and the AMT provisions apply starting with the 2026 tax year. Some are headline wins (permanently higher AMT exemptions, expanded QSBS benefits), but there are caveats worth understanding.

AMT Updates

What Changed

• Higher AMT exemptions from the 2017 Tax Cuts and Jobs Act (TCJA) are now permanent (still indexed for inflation). For 2026, the exemption is $90,100 for single filers and $140,200 for joint filers.
• Phaseout thresholds reset lower starting in 2026: $500,000 (single) and $1,000,000 (joint).
• Phaseout rate doubles starting in 2026: 25% to 50%.

Why It Matters

• Employees exercising ISOs keep the higher exemptions instead of seeing them revert to pre-2018 levels.
• High earners will hit AMT faster because the phaseout starts sooner and ramps twice as quickly.

Note: Exemption amounts are inflation-indexed each year. See our stock option taxes guide for how AMT fits with ISO and NSO taxes.

QSBS (Qualified Small Business Stock) Updates

Changes (stock issued after July 4, 2025)

• Cap increase: the exclusion cap rises from $10M to $15M per issuer (indexed for inflation starting in 2027).
• Tiered holding period:
  
  • 3 years = 50% exclusion
  • 4 years = 75% exclusion
  • 5 years = 100% exclusion
• Asset test increase: the company's gross asset limit rises from $50M to $75M, widening the pool of companies that qualify.

Stock issued on or before July 4, 2025 keeps the prior rules: a $10M cap, a $50M asset limit, and a 5-year hold for any exclusion.

The QSBS cap increase mainly benefits repeat founders and larger investors; most startup employees rarely come close to the original $10M cap. Because most QSBS-eligible companies already take 5+ years to exit, the shorter holding periods mainly matter at the margins: early liquidity events such as secondaries or founder cash-outs during financing rounds, and the occasional early exit. The more meaningful shift may be the higher asset test, which opens QSBS to larger, slightly more mature companies. That expands eligibility to more employees and reduces some of the risk that comes with exercising early at a very young startup.

Challenges and Frictions

Capturing QSBS as an employee is harder than it looks on paper. You need to be at the company early enough and have enough conviction in its future to put your own capital at risk, often years before liquidity is even possible. Unlike investors, who buy preferred shares and spread risk across portfolios, employees typically concentrate risk in a single company.

Even with the new cap and asset test, most QSBS-eligible companies remain small, and transfer restrictions plus limited buy-side demand still present bigger barriers than tax policy itself. The likelihood of a QSBS company reaching liquidity before the 5-year hold period is fairly low.

Awareness and Employee Behavior

Companies sometimes alert employees when QSBS eligibility is about to expire, and OBBB may increase overall awareness. That could push more employees to exercise earlier, but the real-world impact is likely modest.

Big Picture

Overall, the OBBB is a positive trend for startup equity taxation. For now, liquidity challenges (limited buyers, transfer restrictions, early-exercise risk) still outweigh tax policy for most employees. In practice, the OBBB has the largest impact on founders and early investors through QSBS, while permanently higher AMT exemptions provide incremental relief for employees exercising ISOs.

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Written by Jordan Long, CMO at ESO Fund