QSBS rollovers: A guide to the Section 1045 rollover

What is a QSBS rollover?

A QSBS rollover allows taxpayers to defer capital gains taxes on the sale of qualified small business stock (QSBS) held for at least six months by reinvesting the proceeds into new QSBS within 60 days. Section 1045 of the Internal Revenue Code (IRC) outlines the requirements for QSBS rollovers.

Instead of facing a significant tax bill after an exit, a QSBS rollover lets you invest in another qualifying company or fund your next startup.

What qualifies as QSBS?

For stock to qualify as QSBS and receive the tax benefit, it must typically be held for at least three to five years. The potential tax savings from a full QSBS exclusion can be substantial, particularly for founders with significant equity at exit. For shares issued after July 4, 2025, under the One Big Beautiful Bill Act (OBBBA), QSBS tax exclusions are phased in, with a 50% capital gain exclusion for a three-year holding period, a 75% exclusion for a four-year holding period, and full exclusion of up to $15 million (or 10x the cost basis, whichever is greater) when eligible stock is held for five years (providing you've met all required conditions).

If you sell eligible shares before the holding period requirement has been completed, you may be subject to capital gains tax. Section 1045 allows you to preserve QSBS eligibility through a stock rollover.

→ Learn more about QSBS stacking and packing

A founder’s guide to QSBS

Our free guide to help startup founders navigate the nuances of QSBS and maintain their company’s status.

Free download

How to preserve QSBS eligibility through Section 1045 rollovers

When you execute a Section 1045 rollover, you are tacking the holding period of your original stock onto your new replacement stock, preserving your eligibility for the QSBS tax exemption under Section 1202. However, for this to work, the original stock must have maintained its QSBS status for substantially all of the time you held it.

Without an annual record of attestation, it is difficult to prove years later that the original company didn't disqualify itself (for example, by holding too much cash or changing business models) before your exit.

Note: If you're thinking about electing to report a Section 1045 rollover, consider working with a qualified tax professional. If your company uses Carta for equity management, you may have access to an equity tax advisor for free.

Free QSBS eligibility guide

Knowing how to maintain QSBS eligibility is crucial to protecting your potential tax savings.

Free download

How to qualify for a QSBS rollover

To successfully execute a QSBS rollover and receive a tax deferral on your capital gains, you must meet three requirements.

The six-month holding period

The holding period begins the moment you acquire your shares. To be eligible for a rollover, the original QSBS must be held for more than six months before the date of the sale.

The six-month threshold matters most for founders with an earlier-than-expected exit. Without the rollover, gains on shares held less than one year are taxed at ordinary income rates. If you haven't yet met a tiered exclusion under Section 1202—50% at three years, 75% at four years, and 100% at five years—for shares issued after July 4, 2025, the rollover lets you defer your tax liability.

The 60-day reinvestment window

You must use the sale proceeds to purchase replacement stock within a 60-day window that begins on the date of the sale.

Finding a qualified investment, conducting due diligence, and managing deal closings within two months is challenging, especially alongside the other demands of an exit.

Finding (and monitoring) qualified replacement stock

The replacement stock must be newly issued from a U.S.-based C corporation that meets all the original QSBS tests at the time of investment. That includes the gross assets test: the company must have had aggregate gross assets of $75 million or less at the time of your investment (and at all times prior to your investment). Once you've reinvested, the replacement company must also meet the active business requirements for substantially all of your remaining holding period.

The risk of silence

If the replacement company stops qualifying two years after your investment, your entire deferred gain could become taxable. This is why investors should require annual QSBS attestation letters from the replacement company as a condition of their investment.

See how much you could save with the QSBS exclusion

Estimate your potential tax savings based on your specific shares and holding period with this simple tool.

Download our free QSBS calculator

Reporting a QSBS rollover

To elect a Section 1045 rollover, you must complete Form 8949 and Schedule D (Form 1040) as part of their income tax return. Report the gain on Form 8949 under either Part I or Part II.

When reporting the gain, you treat it as any other short- or long-term capital gain but must enter "R" in column (f) of Form 8949. Note the amount of non-recognized gain in parentheses in column (g).

Additionally, you need to attach a statement to Schedule D (Form 1040) that provides the following details:

• The name of the corporation that issued the QSB stock

• The name and employer identification number (EIN) of the selling partnership

• The dates the QSB stock was purchased and sold

• The amount of gain that isn't recognized under Section 1045

• The name of the corporation that issued the replacement QSB stock

• The date the replacement stock was purchased

• The cost of the replacement stock

Section 1045 rollover when a partnership purchases replacement stock

Under Section 1045, if a partnership purchases replacement QSBS within 60 days of the sale, the gain can be deferred at the partnership level. The partners can then benefit from the rollover deferral as long as the partnership itself meets the requirements for §1045 and reinvests in qualified stock.

Reporting the gain

If a partnership elects to roll over the gain into new QSBS, the gain eligible for Section 1045 rollover treatment should be reported on Schedule K-1, line 11, code M.

The partnership should also provide taxpayers with the following information:

1. The name of the corporation that issued the QSBS

2. The recipient's share of the partnership's adjusted basis and sales price of the QSBS

3. The dates the QSBS was bought and sold

4. The recipient's share of gain from the sale of the QSBS

5. Your share of the gain that was deferred by the partnership under Section 1045

Section 1045 rollover when a partnership does not purchase replacement stock

If a partnership does not purchase replacement stock, the partners can still elect to defer their individual share of the gain, as long as the replacement stock is purchased in their own name.

Step one: Reporting the gain

The gain eligible for Section 1045 rollover treatment should be reported on Schedule K-1, line 11, code N of the partner's Schedule K-1. The partnership should provide taxpayers with the following:

1. The name of the corporation that issued the QSBS

2. The recipient's share of the partnership's adjusted basis and sales price of the QSBS

3. The dates the QSBS was bought and sold

4. The recipient's share of gain from the sale of the QSBS

Step two: Rollover election

See “Reporting a QSBS Rollover” section above.

Opting in or out

A partner must decide whether to roll over gains with the partnership, opt out entirely, or opt out and roll into QSBS of their choosing.

• Opt in: Report the gain per the “Reporting a QSBS Rollover” instructions above.

• Opt out: To opt out, the partner must report the gain as a standard gain on Form 8949 and notify the partnership in writing of the amount of gain they are recognizing.

• Opt out and roll over into new QSBS: Report the gain per the "Reporting a QSBS Rollover" instructions above, and notify the partnership in writing.

Getting an audit-defensible QSBS attestation letter

The burden of proof in a tax dispute falls on the taxpayer. Years after your sale, the IRS could ask you to prove that your original stock met all the necessary QSBS requirements. Without documentation, this is difficult to reconstruct.

A QSBS attestation letter from a qualified third party provides a formal, audit-defensible record confirming your stock's eligibility. For example, when Luminary Cloud scaled its team, it turned to Carta to generate a formal attestation letter, giving its founders and investors the documentation needed for confident tax planning.

As Anthony Cimino, former head of policy at Carta, explains during Carta’s Equity Compensation: Three Essentials You're Not Thinking About webinar, “It's really important that you understand the eligibility and lock in that treatment and clarity around it.” An attestation letter creates a durable record that stands up to scrutiny.

Why annual attestation is the gold standard for rollovers

Because QSBS eligibility can be lost if requirements are not met for substantially all of a shareholder's holding period, it's not enough to confirm status once at the moment of the rollover.

As a best practice, companies should complete a QSBS eligibility review and refresh their attestation letter at least once per year, and after major events like large financings or business model changes. For a rollover participant, these annual letters create a year‑by‑year record of the company's status, so you can substantiate your position and catch eligibility changes before they become costly.

Carta's QSBS attestation service automatically performs this review every 12 months for both founders and investors, providing updated company‑ and shareholder‑level letters to support ongoing compliance throughout the entire tacked holding period.

Plan your next move with Carta

Understanding the QSBS rollover before you need it puts you in a stronger position at exit. Carta helps you document eligibility, execute the rollover, and stay compliant through the full holding period. Get expert guidance and dedicated support to make the most of your QSBS eligibility—request a demo today.

Optimize your equity tax benefit

Pay fewer taxes on your equity and increase stakeholder profits with the QSBS tax exemption.

Get started

Frequently asked questions about QSBS rollovers

What is the 80% active business requirement for QSBS?

To qualify for QSBS, a company must use at least 80% of its assets in the active conduct of a qualified trade or business. This rule excludes certain industries.

Do all states recognize the QSBS rollover?

No, state conformity with federal QSBS rules varies. You may still owe state-level capital gains tax even if you successfully execute a federal rollover, so it's important to consult with a tax professional about your specific state's laws.

Can I use a rollover for stock acquired through incentive stock options?

Yes, but the holding period for QSBS begins when you acquire the shares, not when the company grants the options. You must hold the stock for at least six months after the exercise date to be eligible for a rollover.