1202 Gain Exclusion Under The One Big Beautiful Bill

On July 4, 2025, President Trump signed the One Big Beautiful Bill into law. The legislation makes far-reaching changes to the federal tax code and other parts of the government. The bill cuts certain taxes, changes funding for a number of federal programs, raises the debt ceiling by $5 trillion, and extends many of the provisions originally introduced in the 2017 Tax Cuts and Jobs Act (TCJA).

1202 Gain Exclusion

Under prior law, taxpayers can exclude capital gains from disposal of eligible C corporation stock from their taxable income for the greater of $10 million or ten times their original investment.. The stock must have been issued to the taxpayer directly from the corporation at a time when the gross assets of the business did not exceed $50 million. The taxpayer must have held the stock for at least five years before the disposition. Certain businesses do not qualify for the exemption. These businesses are largely the businesses treated a specified service trade or businesses under the qualified business income deduction rules, plus engineering companies and banks. C Corporations are not shareholders who are eligible for this special gain treatment.

The One Big Beautiful Bill liberalized the rules for claiming 1202 gain exclusions for stock acquired after July 4, 2025. The biggest change is that a partial exclusion is available for that stock if the stock is held for three or four years instead of five. If the stock is held for at least three years, there is a 50% gain exclusion. If the stock is held at least four years, there is a 75% gain exclusion. If the stock is held at least five years, it still qualifies for a 100% gain exclusion.

The One Big Beautiful Bill increases the maximum exclusion amount to the greater of $15 million or ten times the taxpayer’s original investment for stock acquired after July 4, 2025.

If the stock is acquired after July 4, 2025, the maximum gross asset value of the company is not $75 million instead of $50 million.

Previous congresses have considered reducing the potential benefits of 1202 stock. The One Big Beautiful Bill expanded those benefits instead. When a taxpayer evaluates the purchase of potential 1202 stock, they should always consider the possibility that future congresses might reduce the benefits of these provisions.

Taxpayers who already have 1202 stock under the old rules need to remember that the gains on selling that stock are still taxed under the old rules. The new rules are only in effect for stock acquired after July 4, 2025.

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With major changes to tax rules, both individuals and business owners are encouraged to revisit tax strategies. A proactive approach will be essential to capture benefits, manage risk, and stay compliant as the new provisions take effect. If you have questions about the information outlined above, or need assistance with another tax issue, WhippleWood CPAs can help. For additional information call 303-989-7600 or click here to contact us. We look forward to speaking with you soon.