How Founders Can Defer Seven-Figure Gains with a QSBS §1045 Rollover
- Gustaf Rounick, CFP®, ChFC®
- Sep 1
- 6 min read
Introduction to the tax challenge and the Section 1045 solution
Founders of high-growth startups often face the challenge of paying significant taxes when they sell their shares. Qualified Small Business Stock (QSBS) can offer relief through gain exclusion under Section 1202 of the Internal Revenue Code. However, many founders discover that they still owe taxes on gains that exceed the exclusion limits. Section 1045 provides a valuable rollover opportunity that lets founders defer tax on seven-figure gains by reinvesting proceeds into new QSBS. This article explains how QSBS Section 1045 rollover works, who qualifies, key deadlines, and practical steps founders can take to preserve more capital while complying with IRS requirements. SEO Keywords: QSBS Section 1045 rollover, qualified small business stock tax deferral, startup founder tax planning.
What makes stock “Qualified Small Business Stock” under §1202
Qualified Small Business Stock (QSBS) refers to shares issued by a C-corporation whose aggregate gross assets did not exceed $50 million when the stock was issued. To qualify, the corporation must actively conduct a qualified trade or business, excluding certain service industries. Founders and early employees who hold QSBS for more than five years may exclude up to 100 percent of the gain on sale, subject to a per-issuer limit of the greater of $10 million or ten times the taxpayer’s basis in the stock. This exclusion is a powerful incentive for founders but can leave seven-figure gains above the exclusion threshold exposed to tax.
Why full gain exclusion isn’t always enough for founders
Not every share sale qualifies for full gain exclusion. If the gain on sale exceeds the Section 1202 exclusion limit, the excess gain is taxable. Furthermore, QSBS benefit requires a five-year holding period, which may not align with a founder’s liquidity needs if an investor or acquirer pushes for an earlier exit. Section 1045 enters the picture to offer a partial solution: it allows taxpayers who have held QSBS for more than six months but less than five years to defer recognition of gain by rolling over the proceeds into replacement QSBS.
How §1045 bridges the gap left by the five-year holding rule
Section 1202 provides the basic gain exclusion for QSBS, but it does not address how to handle sales before the five-year mark or gains exceeding the limit. Under IRC Section 1202, eligible taxpayers may exclude qualifying gains up to the statutory cap [2]. However, Section 1045 was introduced to bridge the gap, allowing for deferral of gains on QSBS held more than six months through timely reinvestment into new QSBS. This mechanism can be particularly beneficial for founders who need liquidity earlier than a five-year horizon.
Key mechanics of the §1045 rollover election
Internal Revenue Code Section 1045 outlines the rollover rules for QSBS gains. If a taxpayer sells QSBS held for more than six months, the taxpayer may elect to defer recognition of the gain by purchasing replacement QSBS within 60 days after the sale [1]. The rollover election must be made on a timely filed tax return, and it applies only to the extent the replacement investment equals or exceeds the amount realized on the original sale. Section 1045 rollover resets the holding period and basis for the new stock, effectively carrying over the old QSBS’s deferred gain.
Core eligibility criteria for a successful rollover
To qualify for Section 1045 rollover, founders must meet several requirements. First, the stock sold must be QSBS as defined under Section 1202. Second, the taxpayer must have held the stock for a minimum of six months before sale. Third, the replacement stock must also qualify as QSBS and be acquired by the taxpayer (or a partnership in which the taxpayer holds an interest) within 60 days of the sale date. Failure to satisfy any of these requirements disqualifies the rollover election and triggers immediate recognition of gain.
Managing the strict 60-day replacement-stock deadline
The 60-day window for acquiring replacement QSBS is strict. For example, if a founder sells their QSBS on July 31, 2025, they must close on the purchase of new QSBS by September 29, 2025. Weekends and holidays are included in this period, so founders should begin evaluating replacement investments well in advance of the sale. Working closely with legal and financial advisors to prepare term sheets, due diligence, and subscription agreements can help ensure that the acquisition is completed on time.
Ensuring your new investment still qualifies as QSBS
Replacement QSBS must meet the same eligibility criteria as the original stock. The issuing corporation must be a domestic C-corporation with gross assets under $50 million at the time of issuance, and it must conduct an active trade or business. Shares acquired directly from the issuing corporation in a taxable transaction qualify, while secondary market purchases typically do not. Founders considering a rollover should identify potential corporations that meet QSBS requirements and have the financial capacity to accept an investment of the needed size.
How basis adjustments carry over with deferred gain
When founders make a Section 1045 rollover election, the tax basis of the replacement QSBS is reduced by the amount of the deferred gain. For instance, if a founder realizes $5 million from the original sale and defers $4 million of gain by rolling into new QSBS, the basis in the replacement stock equals the purchase price minus $4 million. This carryover basis impacts future gain calculations when the replacement stock is eventually sold.
The power of indefinite gain deferral until sale
Founders should track basis adjustments carefully and maintain thorough documentation.
One of the greatest benefits of Section 1045 rollover is the indefinite deferral of gain until the replacement QSBS is sold. Unlike the exclusion under Section 1202, which limits the amount of tax-free gain, rollover under Section 1045 allows the entire deferred gain to remain sheltered until the new stock is disposed of. At that point, the gain is recognized, but founders may again pursue Section 1202 exclusion if they have held the replacement stock for five years and meet the eligibility criteria.
Pairing §1045 rollover with §1202 exclusion for max savings
Founders can use Section 1045 rollover together with Section 1202 to maximize tax efficiency. After completing a rollover and acquiring replacement QSBS, a founder who holds the replacement stock for five years may exclude gains under Section 1202 up to the statutory limit. This two-step strategy effectively allows a founder to defer and potentially exclude gains that would otherwise generate significant tax liability. Proper planning and timing are critical to align sale and reinvestment dates with holding period requirements.
A practical $7 million rollover example step by step
Consider a founder who sells QSBS on June 1, 2025, realizing a $7 million gain. They have held the stock for two years, so they do not qualify for Section 1202 exclusion yet. By purchasing replacement QSBS of at least $7 million by July 31, 2025, the founder rolls over the entire gain under Section 1045. If they then hold the replacement stock until June 1, 2030, they satisfy the five-year holding requirement from the original sale and may exclude up to $10 million of gain under Section 1202, essentially eliminating any tax on the original $7 million gain.
Common pitfalls and the importance of professional guidance
Despite its advantages, Section 1045 rollover requires careful attention to detail. Founders must ensure the replacement investment closes within the strict 60-day period, that the replacement issuer qualifies, and that the proper elections are made on their tax returns. Failure to meet any requirement can lead to immediate recognition of all deferred gain and potential penalties for late or incorrect tax filings. Engaging experienced tax counsel and financial advisors can help avoid these pitfalls.
Documentation essentials: records, forms, and elections
Documentation is a critical part of the Section 1045 rollover process. Founders should retain records of the sale of original QSBS, including sale dates, amounts realized, and proof of qualified status. They must also document the purchase of replacement QSBS, including subscription agreements, closing statements, and confirmation of the issuer’s QSBS eligibility. On the tax return, Form 8949 and Schedule D should reflect the gain deferral election, and a statement referencing Section 1045 must accompany the return.
Integrating rollover strategy into your exit-planning process
Founders preparing for a liquidity event that may trigger significant QSBS gains should consult with Westlight Wealth early in the process. Our team can help identify potential replacement QSBS opportunities, coordinate with legal counsel to structure transactions, and prepare the necessary tax elections and filings. By integrating QSBS rollover strategies into your exit plan, you can retain more capital for your next venture or personal financial goals.
Next steps: scheduling a consultation for your rollover plan
To learn more about how QSBS Section 1045 rollover can fit into your startup’s exit strategy, contact Westlight Wealth. Preserve more of your hard-earned gains and power your next chapter with confidence.
Work Cited
SEO Keywords Integrated: QSBS Section 1045 rollover, qualified small business stock tax deferral, startup founder tax planning, seven-figure gains defense.
Gustaf Rounick, CFP®
Disclosure:
This article is intended for educational purposes and does not constitute tax advice. Westlight Wealth is a registered investment advisor. Every situation is unique; please consult your tax professional or legal counsel before implementing any QSBS rollover strategy.
