The fast rung of the new federal exclusion costs 15.9 percent of the gain, because the taxed half is charged at a higher rate than an ordinary long-term gain [1][4]. The other half leaves your income at a 3-year hold instead of the old five, and the taxed half is charged at up to 28 percent, with a 3.8 percent surtax on top for high earners [4][5]. Your shares only reach it if a 30-day election put the whole grant on one clock the day it was issued [2][3].

The big picture:

The tax code now trades a shorter hold for a partial break.

For shares bought after July 4, 2025, waiting three years buys half the tax break, four years buys three quarters, and five years still gets the whole thing [1]. Older shares keep the past deal, which needs a full five years before any of the gain is excluded [1]. The new rule is brief, but the money it moves is massive.

What strikes me here is the high price of the early rung. A seller who leaves at three years owes roughly half the tax of a standard long-term holder, because the taxed part hits that 28 percent maximum instead of the usual 20 percent rate [4]. That ceiling bounds the damage, but it remains a specific limit on this gain rather than the normal rate.

The gross-assets test then shuts the door on late arrivals. A company must hold under $75,000,000 in gross assets right before and after giving out the shares, counting the cash the sale itself raised [1]. A massive funding round can therefore close the window on options exercised the next month, since the cash and shares arrive together.

By the numbers

  • $15,000,000 — Per-issuer cap: The gain one person can leave out of income from a single company is capped at fifteen million dollars, cut by whatever was already excluded from that company in past years [1].
  • 10 times — Basis multiplier: The limit is the greater of that dollar figure or ten times the cost basis of the shares sold, with basis set at original issue [1]. Ten times basis only beats the dollar cap above $1,500,000 of basis, which is a sum on the two figures the statute states.
  • $75,000,000 — Gross-assets ceiling: This test checks the balance sheet before the stock is issued and again right after it, counting the money the round raised [1].
  • 30 days — Filing window: The election goes to the Internal Revenue Service (IRS) office where the person files a return, and the rule lets you file before the actual transfer [2].

What I’d watch:

My read is that this shift creates three distinct choices wearing one tax label, and only the last one actually involves the IRS. The people closest to this space tend to argue about the tax rate while entirely skipping the clock.

  • The vesting calendar: Without an election, each piece starts its clock upon vesting, so the final shares of a four-year grant reach the five-year mark 108 months later. With an election, the whole block starts at transfer and reaches the finish line at 60 months [3].
  • The balance sheet: Headcount and valuation say nothing about whether the shares qualify, because the only test is gross assets at the exact moment of issuance [1]. The funding round that makes a grant feel rich often ends the chance for anyone who has not yet exercised.
  • The original-issue test: Shares bought from a peer in a secondary sale, or through a tender, are not acquired at original issue, so they never qualify for the break [6]. That is a completely different question from the one most secondary buyers ask, which focuses strictly on price.

The catch

The part I keep circling is that the early rung is a trade rather than a gift, and the trade can lose. Waiting from three years to five is worth 15.9 points of gain, so holding pays only if the position keeps about 84 percent of its value over those two years. A private company can lose all its worth, and one reader’s washed-out common position in a down-round sale is the shape of that risk, not a forecast.

The next trap is the strict list of blocked fields. Section 1202 ignores service firms in health, law, engineering, architecture, accounting, and consulting, alongside any business whose main asset is the skill of its staff [1]. An engineer holding shares in an engineering services firm must check what the company actually does, because a job title decides nothing.

Finally, an early election is never free. It turns a potential future into an upfront tax bill at grant, and losing unvested shares later produces a capital loss rather than a refund [2]. A reader who leaves before exercising faces a different window, the one priced in Options Trap: The Bill After You Leave, and the two are not the same deadline.

At a glance

The shift: Section 1202 pays a part exclusion at a 3-year hold for shares issued after July 4, 2025, where it once paid only the full one at five. The number: 15.9 percent of the gain still goes to tax at that first rung. The risk: the shares qualify only if the company’s gross assets were under the ceiling on the day they were issued.

Related reading

Sources

[1] 26 U.S.C. § 1202 — exclusion, per-issuer limit, qualified small business, excluded trades. Cornell Legal Information Institute. https://www.law.cornell.edu/uscode/text/26/1202 [2] 26 CFR § 1.83-2 — election to include in gross income in year of transfer. eCFR. https://www.ecfr.gov/current/title-26/section-1.83-2 [3] 26 CFR § 1.83-4 — holding period and basis. eCFR. https://www.ecfr.gov/current/title-26/section-1.83-4 [4] Internal Revenue Service, Topic no. 409, capital gains and losses. https://www.irs.gov/taxtopics/tc409 [5] Internal Revenue Service, Net Investment Income Tax. https://www.irs.gov/individuals/net-investment-income-tax [6] 26 U.S.C. § 1202(c)(1)(B) — original-issue rule (same page as [1]). https://www.law.cornell.edu/uscode/text/26/1202