QSBS Rollover Under Section 1045: Deferring Gain Into New Stock

How does a section 1045 QSBS rollover work?

Sell qualified small business stock (QSBS) you held more than 6 months, buy other QSBS within 60 days starting on the sale date, and elect section 1045 on your return. Gain is taxed now only to the extent the sale proceeds exceed what you paid for the new stock (26 U.S.C. 1045(a)). The rest is postponed, not forgiven: it reduces the new shares' basis and comes back when you sell them.

Individuals, trusts and estates can use it, and so can a pass-through entity, such as a partnership or an S corporation, for its own sale; C corporations cannot (Publication 550). Gain treated as ordinary income cannot be rolled over. Whether the shares you sold are QSBS at all is covered in QSBS for founders and early employees.

A rollover is not simple when:

• The deadlines are tight. Buying after the 60 days makes the whole gain taxable in the sale year; a missed election can be fixed only within set limits (see below).
• The new stock must itself be QSBS. You rely on another company's facts, which you do not control.
• A fund or partnership is involved on either side of the trade.
• The new stock's exclusion tier is unclear when the shares you sold were acquired before July 5, 2025 (see below).

Gather: sale date, proceeds and basis of the shares sold; purchase date and amount paid for the new shares; both companies' QSBS statements; and the subscription documents showing the new shares were issued to you by the company.

How long must I have held the shares I sell?

More than 6 months. That is far shorter than the holding periods the QSBS exclusion needs, which is why the rollover is used when you sell early (Publication 550).

The shares sold must have been QSBS throughout: issued by a C corporation that met the active business test during substantially all of your holding period (26 U.S.C. 1202(c)). If you later sell the replacement shares and want to roll over again, you need to hold the replacement shares themselves more than 6 months; the time you held the original shares does not count toward that test (section 1045(b)(4)(A)).

What counts as replacement stock, and how fast must I buy it?

Replacement stock is QSBS you purchase during the 60 days period that begins on the sale date. Because it must be QSBS in your hands, you generally must buy it at original issue, from the company itself (directly or through an underwriter), not from another shareholder (section 1202(c)(1)(B)).

Unsettled: SAFEs and convertible notes. A SAFE or a convertible note funded within the window is not stock when you pay for it. Neither section 1045 nor IRS guidance says whether paying for one, with conversion into stock later, counts as purchasing QSBS within the 60 days. Treat that as an open question and get advice before relying on it.

How much gain is deferred if I reinvest only part of the proceeds?

The gain taxed now is the smaller of your total gain and the proceeds you did not reinvest. Everything else is deferred (section 1045(a); Schedule D instructions).

1. Gain = proceeds minus basis of the shares sold.
2. Proceeds not reinvested = proceeds minus cost of replacement stock bought within the window.
3. Gain taxed now = the smaller of steps 1 and 2.
4. Deferred gain = step 1 minus step 3, and it reduces the replacement stock's basis.

The test compares proceeds, not gain, with the amount reinvested. Reinvesting only the gain portion still leaves gain taxable.

Can I roll over into several startups, or through a fund?

Yes, you can split proceeds across several new companies. The statute counts the cost of "any" QSBS bought in the window, and the deferred gain reduces the basis of each replacement purchase in the order you bought them (section 1045(b)(3)). A purchase already used to shelter one sale cannot shelter another.

Funds and partnerships follow their own regulation, 26 CFR 1.1045-1:

An eligible partner generally held the partnership interest from the day the partnership bought the QSBS until it sold it. Fund partners should check the fund's Schedule K-1, box 11, for the information they need (Schedule D instructions).

What basis, holding period and QSBS tier does the new stock get?

Basis is what you paid for the new stock minus the deferred gain. Holding period includes the time you held the shares you sold, for most purposes (26 U.S.C. 1223(13); Publication 550). So the clock toward long-term treatment and toward the QSBS exclusion keeps running.

Two parts of the clock do not carry over:

• The new company's active business test is measured only over the time you hold the new shares.
• A second rollover needs the new shares held more than 6 months on their own.

Unsettled: which QSBS tier applies. Since the 2025 law, the exclusion rules depend on whether stock was acquired on or before July 4, 2025, or later. The acquisition date is "the first day on which such stock was held by the taxpayer determined after the application of section 1223" (section 1202(a)(6)(B), added by Public Law 119-21). Because section 1223 carries over the old shares' holding period, that date can fall before July 5, 2025 even when the new company issued its shares later. The IRS has not published guidance applying this to rollover stock. Do not assume either tier until that is resolved for your facts. The tiers and caps themselves are in QSBS for founders and early employees.

The per-company cap that limits the exclusion includes a 10-times-basis option, and that option uses your adjusted basis, which the rollover reduced (section 1202(b)).

What must the new company keep doing after I buy in?

For the rollover itself, the new company must meet the QSBS active business test for at least the first 6 months you hold its shares (section 1045(b)(4)(B); Publication 550). That means at least 80% of its assets used in a qualified business, which excludes fields such as health, law, consulting, financial services, banking, investing, and operating hotels or restaurants.

For a later QSBS exclusion on the new shares, the company must stay a C corporation and meet the active business test during substantially all of the time you hold them. Ask the company for its QSBS statement and how it tracks these tests; the company-side records are covered in the QSBS statement and records guide.

How do I make the 1045 election, and can I fix a missed one?

Make the election on a return filed by its due date, including extensions, for the year of the sale (Schedule D instructions). On Form 8949, report the sale in Part I or Part II as usual, enter code R in column (f), and enter the postponed gain as a negative number in column (g).

QSBS rollover now or wait for the exclusion: how do I compare them?

The exclusion removes gain permanently; the rollover only postpones it. If you can hold until a tier is reached, the exclusion gives a final result. A rollover fits when you sell early and want to stay invested in startups.

Also ask how close you are to the next tier: stock acquired after July 4, 2025 can earn a 50% exclusion at three years, while older stock needs more than five years. Selling in a tender offer or an acquisition adds its own issues, covered in tender offers and secondaries and taxes when your startup is acquired.

Does my state follow the QSBS rollover?

Not always. Each state decides whether to follow section 1045, so a gain deferred federally can be taxed by your state in the sale year. California does not follow it (FTB Schedule D (540) instructions). Check your state's rule in state tax on QSBS gains.

Example

All figures are illustrative, in US dollars.

Selling at four years, rolling over everything

A founder bought shares for $50,000 in 2022. She sells them in 2026 for $1,050,000, a $1,000,000 gain. Stock acquired before July 5, 2025 needs more than five years for the exclusion, so none applies yet. Both companies meet the QSBS tests.

• Within 60 days: she buys $1,050,000 of newly issued seed-round stock from another startup and elects section 1045.
• Sale year: proceeds not reinvested are $0, so no gain is taxed.
• New shares: basis $1,050,000 minus $1,000,000 = $50,000; her holding period starts in 2022.
• Later sale: the $1,000,000 deferred gain is taxed then, unless an exclusion applies to the new shares.

Partial rollover after a secondary sale

An employee sells QSBS held for two years in a secondary sale for $600,000; her basis is $100,000, so the gain is $500,000. She buys $400,000 of new QSBS directly from another startup within 60 days and elects section 1045.

• Gain taxed now: $600,000 minus $400,000 = $200,000.
• Gain deferred: $500,000 minus $200,000 = $300,000.
• New shares' basis: $400,000 minus $300,000 = $100,000.

Day 61

A founder sells QSBS for a $400,000 gain and wires $500,000 into a new startup on day 61, counting the sale date as day one. The purchase misses the window, so no rollover is available and the full $400,000 gain is taxed in the sale year.

Different for you?

• Not sure your shares are QSBS, or which tier and cap apply: see QSBS for founders and early employees.
• Selling in a tender offer or to an investor: see selling startup shares in a tender offer.
• Your company is being acquired for cash and stock: see taxes when your startup is acquired.
• Your state may tax the deferred gain now: see state tax on QSBS gains.
• You need the new company's QSBS statement or records: see the QSBS statement and records guide.
• You are near the 60 days deadline, missed the election, rolled through a fund, or sold shares acquired before July 5, 2025: these turn on deadlines and unsettled rules; get individual tax help before you file.