Section 1045 Rollover: How to Defer QSBS Gains Before the 5-Year Mark

The One Big Beautiful Bill Act’s tiered QSBS exclusions are generating headlines, but they are irrelevant if you are selling pre-OBBBA stock. Those benefits only apply to stock acquired after July 4, 2025, which cannot reach the three-year tier until mid-2028. Currently for early sellers, the Section 1045 rollover is the tool that actually matters.

This guide covers how it works, when to use it, and when to skip it.

• A 1045 exchange defers capital gains by reinvesting QSBS sale proceeds into new QSBS within 60 days, postponing the tax.
• Pre-OBBBA qualified small business stock still follows the old 5-year, all-or-nothing cliff for the Section 1202 exclusion.
• Holding period tacking is the key advantage. Your original holding period carries over to replacement stock, building toward the five-year threshold for the full Section 1202 exclusion.
• The replacement QSBS must independently qualify under Section 1202 at the time you acquire it, including original issuance from a domestic C corporation with gross assets under $75 million.
• A rollover is not always the right call. Concentration risk, liquidity needs, and the quality of available replacement QSBS should drive the decision, not tax savings alone.

The regime that applies to you depends entirely on when you acquired your stock.

Pre-OBBBA Stock

Pre-OBBBA stock (acquired on or before July 4, 2025) operates under the original Section 1202 framework. You need to have held the stock for at least 5 years to qualify for the gain exclusion. There is no partial credit at 3 or 4 years. The exclusion is capped at the greater of $10 million or 10x your adjusted basis per issuer, and the issuing company must have had gross assets of $50 million or less at the time of issuance.

Post-OBBBA Stock

Post-OBBBA stock (acquired after July 4, 2025) benefits from the tiered exclusion structure: 50% at three years, 75% at four years, and 100% at five years. The gross asset threshold rises to $75 million, and the per-issuer cap increases to $15 million. These are meaningful improvements, but the earliest any post-OBBBA stock can hit the three-year tier is July 2028.

What this means in practice

If you are selling QSBS in 2026 or 2027, you almost certainly hold pre-OBBBA stock. No partial exclusion exists for you. You either hold for the full five years or you pay tax on the entire gain. 

Section 1045 is the bridge that keeps the clock running toward five years without triggering a taxable event at the federal level.

Think of a Section 1045 rollover (sometimes called a 1045 exchange) as the QSBS equivalent of a 1031 exchange in real estate. You sell appreciated stock, reinvest the proceeds, and defer the capital gains taxes. The comparison is useful for framing, but the mechanics differ substantially.

Despite the ‘exchange’ shorthand, a 1045 rollover is not a like-kind exchange, and it is not an Opportunity Zone deferral. Section 1045 is narrowly tailored to qualified small business stock as defined under Section 1202. 

The core concept: sell QSBS held for more than six months, reinvest proceeds in new QSBS within 60 days, and defer the capital gain. The tax is postponed, not eliminated. The deferred gain reduces the cost basis of your replacement stock, so you recognize that gain when you eventually sell the replacement (unless it qualifies for a Section 1202 exclusion at that point).

Eligibility

Both the stock you sell and the stock you buy must independently qualify as QSBS. Only non-corporate taxpayers (individuals, trusts, estates) can use Section 1045. You must have held the original stock for more than six months, and the gain must be capital gain, not ordinary income (so watch for Section 83 complications on founder stock).

The 60-day Reinvestment Window

The clock starts on the date of sale. You must actually purchase replacement QSBS within 60 days. Unlike a 1031 exchange, there is no identification period; you buy or you do not. Partial rollovers are permitted, but the mechanics are not proportional: gain is recognized to the extent your sale proceeds exceed what you reinvest in replacement QSBS. If you reinvest only part of the proceeds, you recognize a gain equal to the unreinvested amount (up to your total gain) and defer the rest.

Holding Period Tacking

This is the mechanism that makes a 1045 rollover a genuine bridge to the Section 1202 exclusion. Under §1045(b)(4) read with §1223(1), your original holding period carries over to the replacement stock for purposes of the five-year Section 1202 test. The §1045(b)(4) limitation on §1223 only restricts the use of tacking when determining whether you met the six-month minimum for the rollover itself. It does not limit tacking for the later Section 1202 exclusion.

To illustrate: if you held the original stock for three years and then hold the replacement for two more years, the replacement is deemed held for five years, qualifying for the full exclusion.

Basis Adjustment

Your unrecognized gain reduces the basis of the replacement stock. If you bought multiple lots as replacement, the basis reduction applies in the order acquired. This creates a lower cost basis, which means a larger gain if you sell the replacement without a Section 1202 exclusion.

Election

You’d make the Section 1045 election on your tax return for the year you sold the original stock, following IRS Revenue Procedure 98-48. You’d report the transaction on Form 8949 using code R in column (f). Once made, the election is revocable only with written IRS consent.

The replacement stock must satisfy every Section 1202 test at the moment of acquisition. That means:

• Issued by a domestic C corporation
• Acquired at original issuance (not on the secondary market), with the issuing company’s gross assets under $50 million (pre-OBBBA) or $75 million (post-OBBBA) at the time of issuance.
• The company must operate a qualified trade or business and meet the active business requirement for at least the first six months after your investment.

Finding qualifying stock within 60 days is a practical challenge. Realistic sources include angel investments in early-stage C corporations, QSBS-focused investment funds (where the fund structure ensures you receive actual original-issuance QSBS), and direct investment in a founder’s new venture where you can verify qualification upfront.

You can spread proceeds across multiple qualifying replacement companies within the 60-day window, which applies to your aggregate reinvestment rather than per stock. That allows you to diversify within the QSBS asset class but multiplies the diligence work, since each company must independently meet every Section 1202 test.

A concrete comparison illustrates the tradeoff for the dominant 2026 scenario: a pre-OBBBA holder selling before the five-year mark.

Scenario: You acquired QSBS in January 2023 for $200,000. You sell in June 2026 (held approximately 3.5 years) for $2,000,000. Your realized gain is $1,800,000.

Option A: Sell and pay tax now.

• The federal capital gains rate is 23.8% (20% long-term capital gains plus 3.8% net investment income tax). 
• Tax owed: $1,800,000 × 23.8% = $428,400. 
• No Section 1202 exclusion is available because you have only held for 3.5 years under the pre-OBBBA regime. 
• Net after-tax proceeds: approximately $1,571,600. 
• You can diversify freely.

Option B: Roll over via Section 1045.

• Reinvest the full $2,000,000 in new QSBS within 60 days. 
• Federal tax recognized in 2026: $0. 
• Your replacement stock has a cost basis of $200,000 ($2,000,000 purchase price minus the $1,800,000 deferred gain).
• The holding period tacks from January 2023, so the replacement stock is deemed held from that date. Once you pass the five-year mark in early 2028, you can sell the replacement and, if it is worth $2,000,000 or more, exclude the full $1,800,000 gain under Section 1202 (subject to the per-issuer cap, which is well above this amount). 
• Federal tax savings: approximately $428,400.

The tradeoff.

Option B saves roughly $428,400 in federal taxes but requires committing $2,000,000 to replacement QSBS for roughly 18 to 19 months. The rollover can be spread across multiple qualifying companies within the 60-day window, which lets you diversify across names, but the concentration in early-stage private QSBS as an asset class remains.

A critical note for California residents

This example shows federal tax only. California does not conform to Section 1045 or Section 1202, so a California resident owes California tax (up to 13.3%, roughly $239,000 on this $1,800,000 gain) in the year of sale under both options. The rollover defers the federal tax but does nothing for the state bill.

This illustration is for educational purposes only. Actual outcomes depend on your specific basis, holding period, tax bracket, state of residence, the performance and ongoing QSBS qualification of any replacement stock, and other factors. Consult a qualified tax advisor before relying on this strategy.

Several scenarios favor taking the gain and paying the tax.

1. You cannot find a qualifying replacement QSBS within 60 days that you would invest in on the merits. Tax savings should never drive you into a bad investment. If the only available replacement stock is a company you would not otherwise back, pay the tax and move on.
2. Concentration in the QSBS asset class is too high for your situation. Section 1045 lets you spread the reinvestment across multiple qualifying replacement companies, which reduces single-name risk, but the broader concentration in illiquid, early-stage private stock is harder to escape.
3. The replacement company’s QSBS status is uncertain. If you cannot get clear verification that the replacement stock meets every Section 1202 requirement, the entire strategy unravels. Ambiguity here is a dealbreaker.
4. You need liquidity. Personal priorities, whether a home purchase, debt payoff, or portfolio rebalancing, may outweigh the value of deferral.
5. State tax treatment is unfavorable. California and several other states don’t conform to §1045; see the FAQ below for details.

Once post-OBBBA stock begins maturing past July 2028, the 1045 rollover calculus shifts meaningfully.

An investor selling at three years can choose between the 50% OBBBA exclusion (blended effective federal rate of roughly 15.9%) or a 1045 rollover to build toward 100%. At four years, the 75% exclusion drops the effective rate to approximately 7.95%.

Section 1045 exchanges will remain relevant for very large gains exceeding the $15 million OBBBA cap or investors with high conviction in available replacement QSBS. For most investors after 2028, partial exclusions will reduce the necessity of 1045 exchanges.

Can a trust or partnership use a Section 1045 exchange?

Yes. Trusts and estates can elect Section 1045 directly. For partnerships and S corporations, the election can be made at either the entity level or the partner/shareholder level, but tracking the allocation of deferred gain across partners adds complexity. Work with a tax advisor who understands pass-through QSBS mechanics.

Can I roll over QSBS into a QSBS fund instead of a single company?

It depends on the fund structure. Section 1045 generally requires reinvestment into qualifying QSBS acquired at original issuance. Certain fund, SPV, or other investment structures may satisfy these requirements, while a standard venture fund interest typically will not because the fund interest itself is not QSBS. Review the specific structure with qualified tax counsel before assuming a rollover will qualify.

What happens if the replacement company loses QSBS status after I invest?

If the replacement stock qualified as QSBS when you acquired it (including meeting the active-business requirement for the first six months), your rollover deferral stands. The consequence of a later loss of QSBS status is that the gain you deferred becomes taxable when you sell the replacement stock, and the Section 1202 exclusion is unavailable on that sale. This is one of the core risks of a 1045 rollover and a reason to diligence the replacement company’s ongoing QSBS compliance before investing.

Can I do multiple sequential 1045 exchanges?

Yes. There is no statutory limit on consecutive rollovers. The holding period continues to tack each time, and the deferred gain carries forward to reduce the basis of each successive replacement stock. This chain can extend until you reach the five-year mark or decide to recognize the gain.

Does my state conform to Section 1045?

It varies, and conformity to Section 1045 (deferral) is a distinct question from conformity to Section 1202 (the exclusion). California is the clearest case: it explicitly does not conform to either provision. The FTB’s own Schedule D instructions direct California taxpayers to report the entire QSBS gain, which means a 1045 rollover defers federal tax but not California tax, even with a flawless federal election. Pennsylvania, Mississippi, and Alabama also do not recognize the federal QSBS exclusion, and their treatment of the §1045 deferral specifically is less consistently documented. Most other states generally follow federal capital gains rules. Confirm your state’s specific position before assuming a rollover defers state tax.

What if I only reinvest part of the proceeds?

You get a partial rollover, and the gain you recognize is based on the proceeds you do not reinvest, not a percentage of your gain. Gain is recognized to the extent your sale proceeds exceed your reinvestment in qualifying replacement QSBS. For example, if you reinvest $1,500,000 of the $2,000,000 in proceeds, you recognize $500,000 of gain (the unreinvested $500,000) and defer the remaining $1,300,000.

Take the Next Step

A Section 1045 exchange is a precise tool with a narrow window and real tradeoffs. The right move depends on your specific QSBS position, your risk tolerance, the quality of available replacement stock, and how much of your net worth is at stake. Get this wrong, and you either miss the 60-day deadline or concentrate into an investment you should not own.

Summitry’s team works with Bay Area founders and investors navigating exactly these decisions. If you are approaching a QSBS liquidity event and need to evaluate your options, we welcome a conversation.

This material is intended for general informational purposes only, and should not be construed as legal, tax, investment, financial, or other advice. It does not consider the specific investment objectives, tax, and financial condition or needs of any specific person. To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Investing involves the risk of loss, including loss of principal.

Summitry, LLC is a registered investment advisor in the State of California. For more information about Summitry, including fees and services, please see our Form ADV Part 2A or contact us directly.