Founders and early investors often assume that if they miss the five‑year QSBS holding period, the Section 1202 exclusion is simply lost. That is not always true.
In the right fact pattern, a Section 1045 rollover can preserve—or partially preserve—QSBS benefits even when a liquidity event occurs before the five‑year mark. The rules are technical, the timelines are unforgiving, and mistakes are common.
This post explains what a rollover is, when it works, and how we help clients implement it correctly.
What Is a QSBS Rollover?
A rollover is a tax‑deferral strategy governed by Internal Revenue Code Section 1045. It allows a taxpayer who sells qualified small business stock (QSBS) before satisfying the five‑year holding period to reinvest the proceeds into replacement QSBS and continue the holding‑period clock—without triggering current federal capital‑gains tax.
In effect, the gain is deferred, not forgiven, and the original QSBS holding period generally tacks onto the replacement stock if all requirements are met. The taxpayer’s basis in the replacement stock is reduced by the deferred gain, and ultimately the taxpayer may still qualify for the Section 1202 exclusion if the combined holding period reaches the required threshold. (Note: Section 1045 itself requires the original shares to have been held for more than six months; this six‑month minimum cannot be satisfied by tacking under Section 1223.)
When a Rollover May Be Available
A rollover may be possible if all of the following are true:
- The stock sold was original‑issue QSBS.
- The seller held the stock for more than six months but less than five years.
- The amount realized (proceeds) from the sale is reinvested in replacement QSBS to fully defer the gain (partial reinvestment yields only proportional deferral).
- The reinvestment occurs within the 60‑day statutory window after the sale.
- The replacement issuer independently satisfies all QSBS eligibility requirements at issuance; for the active‑business requirement, only the first six months after issuance must be satisfied in some contexts, but the company must otherwise qualify.
Miss any one of these, and the rollover fails.
Why QSBS Rollovers Are High‑Risk Without Planning
Most failed rollovers fail for predictable reasons:
- The replacement company turns out not to be QSBS‑eligible (e.g., over asset thresholds or in a non‑qualifying business).
- The reinvestment timing is miscalculated.
- The transaction is structured incorrectly at the entity level.
- The client assumes a fund investment qualifies (often it does not).
- No contemporaneous documentation is created.
Once the 60‑day window closes, there is no fix. Rollover planning must happen before a deal closes, not after.
Our Rollover Services
We work with founders, executives, and early investors to design and implement rollover strategies that stand up to scrutiny. Our services typically include:
- QSBS eligibility analysis of the original shares.
- Transaction modeling to determine whether a rollover is available or advisable.
- Replacement QSBS diligence, including entity‑level review.
- Structuring guidance for direct investments, SPVs, or new‑co formations.
- Holding‑period tracking and documentation (including note‑taking on the six‑month and five‑year requirements).
- Coordination with tax preparers and financial advisors.
We do not treat rollovers as a form‑fill exercise. Each rollover is fact‑specific and must be engineered deliberately.
Recent QSBS Changes
For QSBS issued after July 4, 2025, recent legislation (often referred to as the One Big Beautiful Bill Act) introduced phased exclusion percentages—50 % after three years, 75 % after four, and 100 % after five—with higher exclusion caps. These expansions do not eliminate the need for careful rollover planning: the 60‑day reinvestment window and the replacement‑stock requirements still apply, and deferral under Section 1045 remains a critical tool for preserving future exclusion potential.
Common Scenarios We See
- Founders selling stock in an early acquisition at year 2‑4.
- Executives exercising options and exiting too early for full QSBS.
- Angel investors facing unexpected secondary liquidity.
- Family offices repositioning concentrated startup exposure.
In many of these cases, partial QSBS preservation is still possible—but only with fast, informed action.
Timing Matters More Than Anything
If you are within 90 days of a liquidity event, you should already be evaluating rollover options.
If you are past closing, it is usually too late.
Next Step
If you are facing a sale, secondary transaction, or early exit and want to explore whether a QSBS rollover is available, we can assess feasibility quickly and tell you—plainly—whether it is worth pursuing.
The earlier the analysis starts, the more options exist.
This post is for general informational purposes only and does not constitute tax or legal advice. QSBS planning is highly fact‑dependent.
