QSBS (Section 1045) Rollovers: A Primer
If you’ve been diving into the benefits of Qualified Small Business Stock (QSBS), you already know it can offer life-changing tax savings. Thanks to Section 1202, you can exclude up to $10 million (or ten times your basis in the stock) from federal capital gains taxes (and most states) when selling eligible QSBS—provided you hold the stock for at least five years. That’s a huge incentive, but the five-year hold requirement can feel like a hurdle, especially if you need liquidity, had an early exit, took secondary, or want to reinvest before hitting that milestone.
That’s where Section 1045 comes in. Think of it as a safety net for QSBS investors. It allows you to defer capital gains taxes by rolling over the proceeds from a QSBS sale into new QSBS within 60 days. Whether you’re looking to keep your options open while waiting out the five-year clock or aiming to multiply your $10 million exclusion cap across multiple investments, Section 1045 can be a game-changer. Here’s how it works and how you can use it to your advantage.
What Is Section 1045, and How Does It Work?
At its core, Section 1045 is about flexibility. It lets you sell QSBS after holding it for at least six months and reinvest the proceeds into new QSBS without immediately paying capital gains taxes. The gains are deferred until you sell the replacement stock. This is great news if you need to make a strategic exit without giving up the tax advantages of QSBS.
To qualify, there are a few important rules to keep in mind:
Your Original Stock Must Be QSBS: The stock you sell must meet all the requirements of QSBS under Section 1202.
Reinvestment Happens Fast: You have just 60 days from the sale of your original QSBS to reinvest the proceeds into new QSBS.
New Stock Must Qualify Too: The company issuing the new QSBS must also meet the same requirements as the original one, such as being a U.S. C-corporation and operating in a qualified industry (not participating in the excluded business categories noted in Sec. 1202).
If you check all these boxes, you can defer taxes on the gain until you eventually sell the new QSBS. Even better, the holding period from the original QSBS transfers to the new investment, which means you’re still on track for the five-year hold requirement under Section 1202.
Bridging the Gap to the 5-Year Hold Requirement
Let’s say you’ve been holding QSBS for a few years but need to sell early—whether it’s because the company gets acquired, you need liquidity, or another opportunity comes along (like secondary during a funding round). Without Section 1045, you’d lose out on the chance to exclude those gains entirely. But with Section 1045, you can reinvest the proceeds into new QSBS and keep your tax benefits intact.
For example, imagine you bought QSBS in a startup three years ago, and the company is acquired. You sell your shares, netting a significant gain. By rolling over the proceeds into new QSBS within 60 days, you keep deferring the tax on that gain, and the three years you already held the original stock count toward the five-year requirement. If you hold the new QSBS for at least two more years, you’ll qualify for the full QSBS exclusion when you exit the replacement stock. This strategy ensures that an early exit doesn’t derail your long-term tax goals, and can leave you with a big ZERO on your tax bill.
Expanding the $10 Million QSBS Exclusion Cap
Another reason to love Section 1045 is its potential to help you go beyond the $10 million exclusion cap. Under Section 1202, the exclusion applies separately to each QSBS investment, so rolling over gains into new QSBS effectively resets the cap.
Let’s say you sell QSBS in one company and realize $15 million in gains. Section 1202 allows you to exclude the first $10 million, but the remaining $5 million would be taxable. If you use Section 1045 to roll over that $5 million into new QSBS, you defer taxes on that amount and create an opportunity to exclude another $10 million when you eventually sell the replacement stock. With smart planning, you can stack these exclusions, significantly multiplying your tax savings.
Making the Most of Section 1045
Using Section 1045 isn’t hard, but it does require attention to detail and some upfront planning. Here are a few things to consider before jumping in:
Timing Is Everything: The 60-day window for reinvesting proceeds is non-negotiable. If you miss it, the opportunity to defer gains is gone. Start scouting new QSBS investments as soon as you know a sale is coming up.
Check the New Investment’s Eligibility: Not all small businesses qualify as QSBS issuers. The new company must meet the same criteria as your original QSBS investment, such as being a U.S.-based C-corporation with less than $50 million in gross assets.
Keep Good Records: You’ll need to document the sale of your original QSBS, the reinvestment, and the eligibility of the new QSBS to support your claim for tax deferral. Stay organized—it’ll save you headaches later.
Work with a Pro: Tax planning around QSBS and Section 1045 can get complex. A good CPA or tax advisor (or your friends here at QSBSrollover.com can help you navigate the rules and make sure you’re maximizing the benefits.
NOTE: We have one of the largest QSBS expert networks in the country at our disposal - just ask!
When to Use Section 1045
Section 1045 is especially useful in a few scenarios. If your original QSBS investment is acquired or goes public before the five-year mark, rolling over the proceeds into new QSBS lets you preserve your tax advantages. Similarly, if you’ve maxed out the $10 million exclusion on one investment, Section 1045 offers a way to keep deferring gains and accessing additional exclusions with new investments. It’s also a great tool for portfolio diversification, allowing you to shift from one QSBS opportunity to another without triggering immediate taxes.
Why Section 1045 Is Worth Exploring
Section 1045 isn’t as well-known as Section 1202, but it’s an essential part (maybe the most important part) of the QSBS toolkit for savvy shareholders. It lets you adapt to changes in your portfolio, navigate early exits, and potentially multiply your tax savings. Whether you’re aiming to meet the five-year hold requirement or stack exclusions across multiple investments, Section 1045 gives you options that align with your financial goals.
