/>iI. Overview
On June 30, 2025, New Jersey enacted legislation that now incorporates the US federal qualified small business stock (QSBS) rules under Section[1] 1202, effective for dispositions of QSBS for tax years beginning on or after January 1, 2026. This move, combined with recently enacted federal changes under the One Big Beautiful Bill Act (OBBBA), dramatically enhances the tax benefits available for holders of QSBS. Investors, founders, and certain funds operating or investing out of, or resident in, New Jersey may now realize significant new state savings, potentially equal to up to 10.75%, the maximum New Jersey tax rate for the sale of stock.
II. Updates to New Jersey Law
Historically, New Jersey was one of the few states (together with California, Alabama, Mississippi, and Pennsylvania) that did not conform to Section 1202. As a result, even though eligible stockholders could exclude up to 100% of capital gains on QSBS for federal tax purposes, those same gains remained fully taxable under New Jersey’s gross income tax system.
The new law changes that. Beginning in 2026, New Jersey will conform to Section 1202, allowing eligible resident taxpayers to exclude qualifying QSBS gains from state income tax for disposition occurring on or after January 1, 2026 (even if the QSBS was acquired prior to January 1, 2026) and for QSBS acquired after July 4, 2025 to benefit from the more generous federal changes to QSBS rules under the OBBBA. This alignment opens the door to potentially substantial state-level tax savings for New Jersey–based investors and entrepreneurs, up to the maximum New Jersey income tax rate of 10.75%.
III. Federal QSBS Enhancements Under the OBBBA
The OBBBA introduces sweeping reforms to Section 1202 that make the QSBS exclusion more generous and more flexible.
First, for QSBS acquired after July 4, 2025, the holding period required to qualify for the exclusion has been shortened. Gains from such stocks are now eligible for a phased exclusion: 50% for QSBS held for at least three years (but less than four years), 75% for QSBS held for at least four years (but less than five years), and 100% for QSBS held for at least five years. For QSBS acquired on or before July 4, 2025, the traditional more-than-five-years holding period still applies to claim the QSBS exclusion.
Second, the new law increases the per-issuer gain exclusion cap from $10 million to $15 million for stock acquired after July 4, 2025, with adjustments for inflation beginning in 2027.
Third, the definition of a qualified small business is expanded. The threshold for aggregate gross assets at the time of stock issuance is raised from $50 million to $75 million, with future indexing for inflation. This change broadens the universe of companies whose stock may qualify as QSBS, particularly in the growth-stage sector.
For more information on the US federal expansion of the QSBS rules, please see our prior alert related to the expansion of the US federal expansion of the QSBS exclusion: QSBS Benefits Expanded Under One Big Beautiful Bill Act.
IV. Implications for New Jersey Investors and Founders
The convergence of state conformity and expanded federal benefits under the OBBBA significantly increases the after-tax value of investments in early-stage, growth-focused businesses. The shortened holding period provides earlier liquidity options without sacrificing tax benefits, while the higher gain caps and broadened eligibility invite more strategic planning around company formation and stock issuance.
For startup founders, this may make equity-based compensation and early incorporations more attractive. For investors and funds, the new rules open doors to more tax-efficient exits and a deeper pool of qualifying companies.
V. Next Steps
In light of this change, taxpayers who may be holding QSBS (or planning to invest in or incorporate qualifying businesses) should review their current and prospective holdings. Structuring investments and corporate formation to meet Section 1202 eligibility requirements can unlock significant tax benefits at both the federal level and now — for New Jersey residents — the state level.
Please reach out to Timothy J. Santoli, Liz Allison, or your Mintz relationship attorney if you have any questions about how to maximize your Section 1202 tax benefits at both the federal and state level.
