How Founders Can Defer Seven-Figure Gains with a QSBS §1045 Rollover

Figures reflect rules in effect as of October 2026.

If you sell qualified small business stock you have held for more than six months, Section 1045 lets you defer the federal tax on the gain by buying new qualified small business stock within 60 days. Gain is taxed only to the extent the sale proceeds exceed what you reinvest.¹ California does not follow the rollover.²

Founders often sell before the five-year mark that the full Section 1202 exclusion has long required: an acquisition, a secondary sale, a tender offer. Section 1045 can keep that gain off this year’s federal return, if the money goes into another qualifying company quickly.

What makes stock qualified small business stock?

QSBS is stock in a domestic C corporation that you acquired at original issue, for money, property or services. At all times before and immediately after the stock was issued, the company’s gross assets must have been $50 million or less ($75 million for stock issued after July 4, 2025). While you hold it, at least 80% of the company’s assets must be used in an active qualified business.³ Excluded fields include:³

• services in health, law, engineering, architecture, accounting, actuarial science, performing arts, consulting, athletics, financial services and brokerage;
• any business whose principal asset is the reputation or skill of one or more of its employees;
• banking, insurance, financing, leasing and investing;
• farming, and oil, gas and mining; and
• hotels, motels and restaurants.

Section 1202 excludes some or all of the gain when you sell QSBS. The 2025 tax law changed the terms for stock acquired after July 4, 2025:³˒⁴

Gain above the cap, and gain on stock sold before the holding period is met, is taxable. That is where Section 1045 comes in.

How does a Section 1045 rollover work?

The rules, from the statute and IRS Publication 550:¹˒⁵

• You hold the QSBS for more than six months before the sale. The rollover is open to individuals, trusts and other taxpayers that are not corporations.
• You buy replacement QSBS during the 60-day period that begins on the sale date. Weekends and holidays count.
• The replacement stock must be QSBS bought at original issue, and the company must meet the active business test for at least the first six months you hold it.
• Gain is taxed only to the extent the amount realized on the sale exceeds the cost of the replacement stock. Gain treated as ordinary income cannot be rolled over.
• The deferred gain reduces the basis of the replacement stock, and its holding period generally includes the time you held the stock you sold.
• You make the election on your return for the year of sale, filed by its due date including extensions.

There is no five-year ceiling on the rollover. It matters most before five years, because after that the Section 1202 exclusion may already cover the gain, up to the cap.

A hypothetical rollover

A hypothetical founder acquired QSBS in 2023 for $500,000 and sells it on March 2, 2026, for $7.5 million, a $7 million gain. The stock was acquired before July 5, 2025, so none of the gain qualifies for the 1202 exclusion before five years. The 60-day period runs through April 30, 2026.

• Full reinvestment. Buying $7.5 million of new QSBS by April 30 defers all $7 million of gain. The new stock’s basis is $7.5 million less $7 million, or $500,000.
• Partial reinvestment. Buying $6 million of new QSBS leaves $1.5 million of the amount realized not reinvested, so $1.5 million of gain is taxed for 2026. The other $5.5 million is deferred, and the new stock’s basis is $6 million less $5.5 million, or $500,000.

Because the holding period carries over, the replacement stock’s holding period counts from 2023, not 2026.⁶ Which version of Section 1202 then applies to it is the open question below.

Which 1202 rules apply to replacement stock?

The 2025 law applies the new rules by acquisition date, and defines the acquisition date as the first day the stock was held once carried-over holding periods are counted.³ Read literally, replacement stock bought in 2026 for stock acquired before July 5, 2025 could take the older date, and with it the older rules: no 50% or 75% tiers, and the $10 million cap. How this applies to rollovers has not been settled, so it is a question for your tax counsel before you rely on any particular result.

What about California?

California does not conform to Section 1045 or Section 1202.² The full gain is taxed on the California return for the year of sale. California has no lower rate for capital gains,⁷ and its rates reach 13.3% including the 1% tax on taxable income over $1 million.⁸˒⁹ A rollover defers federal tax only, so plan the cash for the state bill, including estimated payments.

What should founders do before a sale?

• Confirm the original shares are QSBS: original issue, gross assets at issuance, and the active business test for the time you held them.
• Identify replacement companies before the sale closes. Sixty days is short for diligence and documents.
• Confirm the replacement shares will be issued to you directly by the company. Shares bought from another holder do not qualify.³
• Keep records of the sale, the purchase, the basis adjustment and both holding periods.
• Have your CPA make the election on Form 8949 and confirm the reporting.⁵

This checklist is a starting point, not a substitute for advice from your attorney and CPA, who structure the transaction and file the election. Where a sale also involves a large single-stock position, my posts on reducing a concentrated stock position, RSU tax withholding and planning equity through an IPO cover the related decisions. QSBS planning is part of how I plan equity compensation. When the sale turns into cash, the decisions that follow are in planning money that arrives all at once.

The Bottom Line

Section 1045 lets a founder who sells QSBS after six months defer the federal gain by reinvesting in new QSBS within 60 days. The gain deferred is limited by what you reinvest, measured against the full sale proceeds. The holding period carries over, but how the 2025 changes apply to replacement stock is unsettled. California taxes the gain in full in the year of sale.

If you expect a liquidity event and want to plan the timing and the cash for both tax bills, book a complimentary 15-minute call.