Section 1045 Exchange: QSBS Rollover Deadlines and Election

A 1045 exchange lets you defer capital gains tax when you sell qualified small business stock (QSBS) and reinvest the proceeds into new QSBS within 60 days. To use it, you must have held the original stock for more than six months, you cannot be a C corporation, and both the stock you sell and the stock you buy have to meet the QSBS definition under Section 1202. Done correctly, the rollover defers the gain and preserves your holding period toward the far larger Section 1202 exclusion.¹

The Two Deadlines That Control the Rollover

Two clocks decide whether a Section 1045 election is even available to you.

First, you must have held the original QSBS for more than six months before the sale. That is a much shorter threshold than the five years required for the Section 1202 gain exclusion, which is what makes the 1045 rollover useful as a bridge when an early-stage investment exits or fails before the five-year mark.¹

Second, once the sale closes, you have exactly 60 days to purchase replacement QSBS. The statute contains no extension provision. Miss the deadline by a day and the entire gain becomes taxable in the year of sale.²

What Counts as Qualified Small Business Stock

Both the stock you sell and the stock you buy have to independently satisfy the QSBS requirements under Section 1202. Failing any one of them disqualifies the rollover.

The issuing company must be a domestic C corporation whose aggregate gross assets never exceeded $75 million before the stock was issued and did not exceed $75 million immediately after. Aggregate gross assets means cash plus the adjusted bases of other property, with contributed property valued at fair market value.³

You must have acquired the shares at original issue: directly from the corporation in exchange for money, property (other than stock), or services. Shares bought from another investor on the secondary market do not qualify. Stock acquired through an underwriter still counts as original issue.⁴

Throughout substantially all of your holding period, the corporation must satisfy the active business test: at least 80 percent of its assets by value must be used in a qualified trade or business.⁵ The corporation also cannot hold more than 10 percent of its asset value in real property that is not used in an active business.

A long list of industries is locked out entirely. Excluded fields include health, law, engineering, architecture, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, banking, insurance, financing, leasing, investing, farming (including timber), mining and natural resource extraction, and hotels, motels, and restaurants. Any business whose principal asset is the reputation or skill of its employees also fails to qualify.³ Ask the issuing company for QSBS certification at the time of purchase. Without it, defending the rollover in an audit becomes significantly harder.

Partial Reinvestment

You are not required to reinvest the full sale proceeds. If you reinvest less than the amount realized, you defer only the portion of gain covered by your reinvestment. Gain is recognized to the extent the sale proceeds exceed the cost of the replacement stock.¹

Suppose you sell QSBS for $2 million with a $500,000 basis, producing $1.5 million of gain. If you only reinvest $1.2 million into replacement QSBS, you recognize $800,000 of gain immediately (the $2 million proceeds minus the $1.2 million reinvestment) and defer the remaining $700,000. Only amounts actually spent acquiring new QSBS count. Transaction fees, legal costs, and due diligence expenses are not part of the replacement stock cost for this purpose.

How Basis and Holding Period Change

A 1045 rollover is a deferral, not a forgiveness. The deferred gain is baked into the replacement stock by reducing its basis. Take what you paid for the replacement shares, subtract the deferred gain, and that is your new basis. Pay $3 million for replacement QSBS while deferring $2.5 million of gain and your basis in the new stock is $500,000. When you eventually sell that stock without another rollover or exclusion, the embedded gain surfaces.⁶

If you chain multiple rollovers over several years, each one compresses your basis further. Keep a permanent record of every rollover and the cumulative adjustment. Losing track can create serious reporting problems when you finally dispose of the stock.

The other side of the ledger is more favorable. The holding period of the original stock tacks onto the replacement stock. If you held the first stock for two years before rolling over, the replacement stock starts its clock at two years rather than zero. That tacking is the whole reason many investors use Section 1045 in the first place.

Why the Rollover Points Toward Section 1202

For stock acquired after September 27, 2010, Section 1202 allows you to exclude 100 percent of the gain from federal income tax when you sell after holding the stock for at least five years.⁴ The exclusion is capped per issuer at the greater of:

$10 million for stock acquired on or before the applicable date, or $15 million for stock acquired after it, reduced by gains previously excluded from stock of the same corporation
10 times your aggregate adjusted basis in the disposed stock from that corporation

Because the caps are per issuer rather than lifetime, an investor holding QSBS in several qualifying corporations can potentially exclude gains up to the cap from each. Section 1045 matters here because holding-period tacking lets you reach that five-year threshold across multiple investments. Without the rollover, selling a QSBS position before year five would restart your clock at zero on any new stock.

Partnerships, S Corporations, and Trusts

Section 1045 applies to any taxpayer other than a C corporation, so individuals, partnerships, S corporations, and trusts can all use it. For a partnership selling QSBS, there are two ways to make the election.

The partnership itself can elect at the entity level. It sells the stock, buys replacement QSBS within 60 days, and the deferral flows through to partners (other than C corporation partners) who held their partnership interest during the entire period the partnership held the stock.²

If the partnership does not make the election, an individual partner can make it independently. The partner takes their distributive share of the gain and buys replacement QSBS personally within 60 days of the partnership’s sale. The partner must have held the partnership interest for the entire time the entity held the stock. This second path requires the partner to move quickly and use their own capital.

How to Make the Election on Your Return

The Section 1045 election is not automatic. You make it on your federal income tax return for the year of the sale. In current practice, you report the sale on Form 8949, using the specific adjustment code for a Section 1045 rollover and entering the deferred gain as a negative number in the adjustment column. That flows into Schedule D.⁷²

Before filing, pull together:

Original stock records: acquisition date, purchase price, and any basis adjustments from prior rollovers
Sale records: sale date and amount realized, confirming the more-than-six-months hold
Replacement stock records: purchase date within the 60-day window, cost, and QSBS certification from the issuing company

The return is due by the standard April 15 deadline, or October 15 with a valid extension.⁸ An extension gives you more time to file, not more time to reinvest. The 60-day clock runs from the sale date regardless of your filing timeline.

If the IRS challenges the rollover and you cannot substantiate the reinvestment, an accuracy-related penalty of 20 percent applies to the underpaid tax.⁹ Keep closing statements, wire confirmations, and QSBS certification letters in a permanent file. Those are the documents that matter in an audit.

State Taxes Do Not Automatically Follow

Federal deferral under Section 1045 does not guarantee the same treatment at the state level. Several states do not conform to the federal QSBS provisions at all, so gains deferred or excluded federally may still be fully taxable on your state return. Others conform only partially, capping the exclusion at a lower percentage or applying different asset thresholds. Conformity shifts frequently, with at least one state decoupling from the federal QSBS exclusion as recently as 2026. Check your state’s current position before assuming the federal benefit carries through.

1
Office of the Law Revision Counsel. 26 U.S. Code 1045 – Rollover of Gain From Qualified Small Business Stock to Another Qualified Small Business Stock
2
Internal Revenue Service. Rev. Proc. 98-48 – Rollover of Gain From Qualified Small Business Stock
3
Office of the Law Revision Counsel. 26 USC 1202 – Partial Exclusion for Gain From Certain Small Business Stock
4
Office of the Law Revision Counsel. 26 U.S. Code 1202 – Partial Exclusion for Gain From Certain Small Business Stock
5
Internal Revenue Service. Internal Revenue Service Private Letter Ruling 202418001
6
Office of the Law Revision Counsel. 26 USC 1045 – Rollover of Gain From Qualified Small Business Stock to Another Qualified Small Business Stock
7
Internal Revenue Service. Instructions for Form 8949 Sales and Other Dispositions of Capital Assets
8
Internal Revenue Service. Need More Time to File? Don’t Wait, Request an Extension
9
Internal Revenue Service. Accuracy-Related Penalty