Section 1045 Rollover

Section 1045 rollover is the IRS provision letting QSBS holders defer capital gains by rolling sale proceeds into new QSBS within 60 days. It applies to QSBS sold before the 5-year §1202 holding period, preserving the original holding period (basis tacks to the new investment) and giving the holder another chance to reach the 5-year mark. Section 1045 mechanics themselves are unchanged by the One Big Beautiful Bill Act, but OBBBA's tiered exclusion (50% at 3 years, 75% at 4, 100% at 5) means a Section 1045 rollover can start producing partial Section 1202 benefit at 3 years rather than the old all-or-nothing 5-year cliff. Important nuance: the exclusion-percentage regime that applies on eventual sale of replacement stock is determined by the original QSBS acquisition date, not the rollover date. Founders should not treat the rollover as a regime-reset. It's the bridge between QSBS holdings that converts a tax disaster into a tax-deferred reinvestment.

The mechanics:

Eligibility:

• Original shares must be QSBS (C-corp, held 6+ months).
• Sale proceeds must be reinvested in new QSBS within 60 days.
• Rollover elected on tax return.

Holding period:

• Original holding period tacks to new investment.
• Example: 3 years in original + 2 years in new = 5 years total for §1202.

Basis:

• New investment takes carryover basis from original (reduced by gain that wasn't rolled over).
• Future §1202 exclusion based on this carryover basis (subject to 10x basis cap).

Partial rollover:

• Can roll over portion of proceeds and recognize gain on portion not rolled.
• Useful when needing some liquidity.

When §1045 is used:

Pre-5-year secondary sale: founder selling shares in secondary transaction before 5 years held; rolling into new QSBS.

Pre-5-year acquisition: company acquired for stock or cash before founder hit 5 years; rolling into new QSBS.

Pre-5-year liquidation event: any sale of QSBS before 5 years where rolling is preferable to recognizing gain.

The qualifying reinvestment:

New QSBS requirements:

• C-corporation.
• Aggregate gross assets ≤$50M at issuance.
• Active business in qualifying trade or business.
• Other §1202 requirements.

Investment vehicles:

• Direct investment in qualifying companies.
• Some funds structured to qualify (rare; complex).

Timing: must reinvest within 60 days of sale.

Common §1045 scenarios:

Founder selling secondary at year 3: rolls proceeds into new C-corp investment within 60 days; holding period continues toward 5 years.

Pre-5-year acquisition: founder facing acquisition of company before 5-year mark; can roll proceeds into new QSBS.

Acquihire: company acquired but founder rolls proceeds into new venture (their next company or another QSBS).

Why §1045 matters:

Saves significant tax: without §1045, pre-5-year sale of QSBS triggers immediate capital gains tax (20% federal + state).

Preserves QSBS treatment: rolled-over shares ultimately may qualify for §1202 exclusion on combined holding.

Founder restart: enables founders to start new ventures with deferred tax on previous exits.

Liquidity preservation: doesn't force sale just to escape pre-5-year exit.

What founders should know:

60-day window: very tight; need to be ready with reinvestment plan.

New investment must qualify: not all C-corps qualify as QSBS; verify carefully.

State treatment varies: §1045 federal; some states don't follow.

Complexity: §1045 rollovers involve technical IRS rules; need tax advisor.

What founders get wrong: Selling QSBS pre-5 years without considering §1045 rollover, then paying immediate capital gains tax that could have been deferred. The right discipline: know about §1045; evaluate at every pre-5-year sale; use tax advisor for technicalities.

Related: QSBS · Capital Gains · Founder Shares · Equity Compensation Tax Planning · Secondary Sale

FAQ

What is Section 1045 rollover?
The IRS tax provision allowing QSBS holders who sell shares before reaching the 5-year holding period to defer capital gains tax by rolling sale proceeds into new QSBS within 60 days. Preserves holding period (tacks to new investment) and continues path toward §1202 exclusion.

When would I use §1045?
When selling QSBS before 5-year holding period: secondary sales, pre-5-year acquisitions, acquihires. Rolling proceeds into new QSBS within 60 days defers capital gains tax and continues the path toward §1202 exclusion eligibility.

What qualifies as new QSBS for §1045?
C-corporation with aggregate gross assets ≤$50M at issuance, active business in qualifying trade or business, and other §1202 requirements. Direct investment in qualifying companies; some funds structured to qualify but rare. Must invest within 60 days of original sale.