Section 1045 Rollover: Deadlines, Basis, and Election Rules

A Section 1045 rollover lets a non-corporate investor who sells qualified small business stock defer the capital gain by buying replacement qualified small business stock within 60 days of the sale. The original shares must have been held for more than six months, and the gain you defer reduces your basis in the new shares rather than disappearing.¹ The election is made on a timely filed return; there is no separate IRS approval process.²

The Two Deadlines That Control Everything

Two clocks decide whether a rollover is even available. First, you must have held the original QSBS for more than six months before selling. Prior owners’ holding periods do not tack on for Section 1045 purposes, so shares received by gift or transfer start a new six-month count on the date you acquired them.¹

Second, once the sale closes, you have 60 days to purchase replacement QSBS. The clock runs from the sale date, not the date proceeds hit your account. There is no statutory extension, no grace period, and no cure for a late purchase.²

What the Replacement Stock Has to Look Like

Replacement stock must independently satisfy every Section 1202 requirement, or the rollover fails even if you bought on time. The essentials:

The issuer is a domestic C corporation whose aggregate gross assets never exceeded $75 million before and immediately after your stock was issued, measured by adjusted tax basis of its property including the cash from the issuance itself.³
You acquired the shares at original issuance, from the corporation or through an underwriter, in exchange for cash, property other than stock, or services. Secondary-market purchases do not qualify no matter how small the company is.³
During substantially all of your holding period, at least 80 percent of the corporation’s assets by value are used in the active conduct of a qualified trade or business, and the corporation remains a C corporation.³

Whole categories of businesses are excluded from “qualified trade or business” status: professional services (health, law, engineering, architecture, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage), banking and insurance and other financial activity, farming, extractive industries eligible for depletion, hotels, motels, and restaurants, and any business whose principal asset is the reputation or skill of one or more employees.³ The reputation-or-skill exclusion is deliberately broad; the IRS has treated it as a catch-all for personal-service operations that do not fit the named fields.⁴

How Much Gain You Actually Defer

You recognize gain only to the extent the amount realized on the sale exceeds what you spent on replacement QSBS within the 60-day window.¹ Reinvest everything and you recognize zero. Reinvest part and you recognize the shortfall.

A worked example: you sell shares for $200,000 that had a $120,000 basis, producing $80,000 of gain. If you buy $170,000 of replacement QSBS in the 60-day window, you recognize $30,000 of gain (the $30,000 you did not reinvest) and defer the remaining $50,000.

One carve-out to watch. The rollover does not shelter any portion of the gain that is treated as ordinary income under recapture rules or any other provision. That piece is taxable no matter how much you reinvest.¹

What the Deferral Does to Your Basis

The deferred gain reduces your basis in the replacement stock, dollar for dollar. In the example above, $170,000 of replacement stock with $50,000 of deferred gain gives you a $120,000 basis in the new shares. When you eventually sell that replacement stock in a taxable transaction, the built-in gain resurfaces through the lower basis. If you bought several lots during the window, the basis reduction is applied in the order you acquired them.¹

Deferral is not a discount. It is a timing shift, and understanding the reduced basis is what keeps the eventual tax bill from being a surprise.

Who Can Elect

The rollover is open to any taxpayer other than a C corporation: individuals, partnerships, S corporations, trusts, and estates.¹ A C corporation that sells QSBS has to recognize the gain under normal rules.

When a partnership or S corporation sells QSBS, the election can happen at either level. The entity can buy replacement QSBS within 60 days and elect on its own return, flowing the deferral through to eligible owners.² If the entity does not reinvest, or reinvests only part of the proceeds, an individual partner can still make a personal election by buying replacement QSBS within the same 60-day window to defer their distributive share.⁵ A partner’s purchase does not count as the entity’s purchase, and vice versa. There is an eligibility gate on the pass-through side: the deferral flows through only to partners who held their interest for the entire time the entity held the QSBS.

Reporting the Election on Your Return

You elect by reporting the transaction correctly on a timely filed return, including extensions.² On Form 8949, report the sale as usual, enter adjustment code “R,” and show the deferred gain as a negative number in column (g).⁶ The totals move to Schedule D, where your net capital gain or loss is calculated.⁷ For most individuals the due date is April 15, with an extension available to October 15; the extension does not extend the time to pay.⁸ Partnerships elect on the partnership’s timely filed return for the year of the sale.⁵

If You Missed the Election

Late-election relief may be available under Treasury Regulation Section 301.9100-3. You have to show two things: that you acted reasonably and in good faith, and that relief will not prejudice the government. The IRS treats you as having acted reasonably if you request relief before the agency discovers the missed election, if events beyond your control prevented a timely election, if you were reasonably unaware of the need to elect after exercising diligence, or if you relied on a qualified tax professional who failed to advise you.⁹ Relief is discretionary, requires a formal request usually supported by affidavits, and is strongest when sought before the IRS asks about it.

Pairing Section 1045 With Section 1202

Section 1202 permanently excludes gain on QSBS held at least five years, but caps the exclusion at the greater of $10 million or ten times your adjusted basis (with a $15 million cap for stock issued after July 4, 2025).³ Section 1045 has no dollar cap. That combination drives most of the planning.

If your gain will exceed the 1202 cap, or if you need to exit before the five-year mark, you can use Section 1045 to roll into new QSBS, then hold the replacement long enough to qualify under Section 1202 on that stock. Holding period tacking helps: for the five-year test under Section 1202, your time in the original QSBS counts toward the replacement stock’s clock under Section 1223(13). Two years in the original plus three years in the replacement gets you across the five-year line. Tacking does not apply to Section 1045 itself, though. If you want to do a second rollover out of the replacement stock, you have to hold that replacement stock for its own fresh six months.¹

State Tax Is a Separate Question

Not every state follows the federal QSBS regime. Some do not conform to Section 1202, and their treatment of Section 1045 varies. You can owe state capital gains tax on a sale that is fully deferred federally. If you hold QSBS in a non-conforming state, the state exposure is worth mapping before you sell rather than after.

1
Office of the Law Revision Counsel. 26 USC 1045 – Rollover of Gain From Qualified Small Business Stock to Another Qualified Small Business Stock
2
Internal Revenue Service. Revenue Procedure 98-48
3
Office of the Law Revision Counsel. 26 USC 1202 – Partial Exclusion for Gain From Certain Small Business Stock
4
Internal Revenue Service. Private Letter Ruling 202418001
5
Federal Register. Section 1045 Application to Partnerships
6
Internal Revenue Service. Instructions for Form 8949 – Sales and Other Dispositions of Capital Assets
7
Internal Revenue Service. Instructions for Schedule D (Form 1040) – Capital Gains and Losses
8
Internal Revenue Service. When to File
9
eCFR. 26 CFR 301.9100-3 – Other Extensions