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The most valuable tax break in startups — and the steepest cliff: one day short of the tier means zero exclusion.
Section 1202 lets founders, early employees, and early investors exclude up to 100% of federal capital gains on qualified small business stock — capped at the greater of $15 million or 10× your basis for stock acquired after July 4, 2025. OBBBA replaced the all-or-nothing 5-year cliff with tiers: 50% at 3 years, 75% at 4, 100% at 5. Two rate details decide real exits: when a partial tier is active, the non-excluded slice is taxed at a special 28% plus 3.8% NIIT (not the usual 20%); and below the tier threshold there is no exclusion at all — the whole gain is ordinary capital gain, until a §1045 rollover defers it and carries your holding period into replacement stock. This calculator prices both regimes.
Founders and early employees use it when an exit offer lands: the tiers (50/75/100% at 3/4/5 years), the $15M-or-10×-basis cap, and the cliff — one day short of a tier means zero exclusion and ordinary 23.8% capital gains, unless a §1045 rollover defers the gain and carries the clock into replacement stock.
Four tests: (1) domestic C-corp — not LLC or S-corp — when the stock was ISSUED to you; (2) company gross assets ≤ $50M (legacy) or $75M (post-OBBBA) at issuance; (3) you acquired at original issuance for money, property, or services — exercising options or vesting RSUs starts the clock, the grant date does not; (4) an active qualified business — services, finance, hospitality, farming, and mining are excluded. The holding clock runs from issuance; every year as an LLC is a year the clock isn't running.
For stock acquired after July 4, 2025 (OBBBA §70432): tiered exclusion (50% at 3 years, 75% at 4, 100% at 5), per-issuer cap up from $10M to $15M, and the gross-assets ceiling up from $50M to $75M — both indexed for inflation from 2027. Legacy stock keeps the old rules entirely: 100% only after more than 5 years, $10M cap. One catch on the new tiers: 7% of the excluded amount becomes an AMT preference item at the 3- and 4-year tiers. The earliest any post-OBBBA stock can hit the 3-year tier is July 2028.
Section 1045 rollover: sell and roll the proceeds into new QSBS within 60 days — the gain defers, and your holding period carries over to the replacement stock, keeping the march toward the tiers alive. Or negotiate the closing date past your tier boundary: on legacy stock the difference between 4.99 and 5.01 years is the ENTIRE exclusion — 0% to 100%. Note the rate nuance: once a partial tier applies, the taxable remainder pays 28% + 3.8% NIIT rather than 20% + 3.8% — still a big win (15.9% effective at the 3-year tier versus 23.8%), just not "half price." This is the conversation to have with your CPA BEFORE signing the LOI.