$2M Gain, 50% Excluded, $318K to the IRS Anyway

You know the rate on selling physical gold. 28%. Same as baseball cards. Same as old wine. The IRS calls these "collectibles" and taxes the gains at a special, higher rate. You've paid it. You remember.

Now Congress just wired that same 28% rate into the new QSBS early exit.

QSBS is the tax break for founders and early investors in small companies. Hold the stock five years and sell it. Up to $15 million in gains vanishes from your tax return. Zero federal tax. The exclusion has existed since 1993. The 100% version has been available since 2010. The $15 million cap is new under the Act.

The One Big Beautiful Bill Act changed the deal. For stock issued after July 4, 2025, you don't have to wait five years anymore. Congress added a tiered schedule. Sell after three years, exclude half the gain. After four years, three quarters. After five, still all of it.

Here's how the financial press covered it:

And the law firm Greenberg Traurig, in a client alert the same week, noted that the QSBS regime had been expanded under the One Big Beautiful Bill Act and that taxpayers holding stock for at least three years now qualify for a partial gain exclusion.

Sure.

The half you don't exclude doesn't get taxed at the normal 15% or 20% long-term rate. It gets taxed at 28%. The collectibles rate. Your startup stock, in the eyes of the tax code, sits in the same line as your gold bullion.

Then stack the 3.8% Medicare surtax on top. The other half of your gain hits 31.8%.

Say you sell at year three with a $2 million gain. Half is excluded. Good. The other million? Taxed at 31.8%. That's $318,000 to the IRS.

Now sell that same stock as a normal long-term gain. No QSBS at all. The rate is 23.8%. That's $476,000.

I mean. Read that again.

What you actually pay at a three-year hold is 15.9% on the full gain. At four years, 7.95%. At five, zero. Each year you wait cuts the bill in half. Or kills it.

It gets worse. A Raymond James planning brief flagged a spot where the exclusion barely saves you money.

Here's how. A guy is in the 15% capital gains bracket. He sells his QSBS at year three. He claims the 50% exclusion. So far so good.

But the half that isn't excluded doesn't stay at 15%. It jumps to the 28% collectibles bucket. His tax bill is now smaller than if he'd skipped the exclusion and just paid 15% on the whole gain.

The "tax break" made him richer. Right?

This isn't malice. It's neglect.

When Congress wrote Section 1202 in 1993, the normal capital gains rate was 28%. Taxing the leftover QSBS gain at 28% was no big deal. It matched everything else.

Then Congress cut capital gains rates. Twice. Down to 20%. Down to 15% for most people. But they never went back and rewired the QSBS number. It's still locked at 28%. A 33-year-old fossil baked into the code.

The plumbing is original. The rest of the house got remodeled around it.

Look, there's a move. Someone waves a buyout offer at year three. You don't want the 28% rate. Section 1045 might save you. Sell your QSBS. Then within 60 days roll the gain into new qualifying small business stock. The holding period from your old stock tacks onto the new stock. The clock keeps running. You don't restart at zero.

You didn't take the early exit. You extended the runway. And at year five, the whole gain disappears.

Congress told founders they could sell early. That's true. They also put the early exit in the same tax line as your gold coins. That's also true.

The headline said "tax break." The code said 28%.

Anyway.