QSBS rollovers: A founder’s 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. This provision is a useful tool for founders and investors to keep their capital working for them.

As an entrepreneur, this is a strategic play for building your next venture. Instead of facing a significant tax bill after an exit, a QSBS rollover lets you use the capital to fund your next company or invest in another promising startup.

What qualifies as QSBS?

For QSBS-eligible stock to qualify as QSBS and receive the tax benefit, it must typically be held for at least three to five years. For shares issued on or after July 4, 2025, QSBS benefits 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 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 tax liabilities on the sale of those shares. This is where Section 1045 comes in; it allows you to preserve QSBS eligibility through a stock rollover.

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How to preserve QSBS eligibility through Section 1045 rollovers

Section 1045 allows for a rollover of otherwise taxable proceeds into new QSBS (replacement stock). Through a QSBS rollover, you can defer recognition of capital gains and reinvest the proceeds into other QSBS, thus preserving the holding period from your first purchase.

Note: If you’re thinking about electing to report a Section 1045 rollover, we recommend 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.

The “substantially all” requirement in rollovers

When you execute a Section 1045 rollover, you are tacking the holding period of your original stock onto your new replacement stock. However, for this to work, the original stock must have maintained its QSBS status for “substantially all” of the time you held it (typically 80% or more of your holding period).

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

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How to qualify for a QSBS rollover

To successfully execute a QSBS rollover and defer 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.

This shorter holding period is what makes the rollover so valuable, especially for founders who experience an earlier-than-expected exit. If you haven't yet met the five-year holding period required for the Section 1202 exclusion, the rollover provides a critical path to deferring your tax liability.

The 60-day reinvestment window

After the sale of the original QSBS stock, the pressure is on. You must use the sale proceeds to purchase replacement stock within a 60-day window that begins on the date of the sale.

This is often the biggest challenge for business owners. Finding a worthy investment, conducting due diligence, and managing deal closings within two months is challenging, especially while managing all the other responsibilities that come with 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. But the work doesn't stop there. 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.

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Reporting a QSBS rollover

To elect a Section 1045 rollover, taxpayers 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, depending on how long the QSBS was held by the partnership.

When reporting the gain, taxpayers 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, taxpayers 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 of the partner’s Schedule K-1.

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 opting out

A partner must decide whether to opt in with their partnership’s election to roll over QSBS gains, opt out of the election, or opt out and roll over gain into QSBS of their choosing.

Opt in with their partnership’s election to roll over QSBS gains

To opt in, follow the instructions outlined under the "Reporting a QSBS Rollover" section above.

Opt out of the election

To opt out, the partner must report the gain as any other on Form 8949 and notify the partnership in writing of the amount of gain they are recognizing.

Opt out and roll over gain into a QSBS

Instructions for reporting this are also listed under the "Reporting a QSBS Rollover" section above. Again, the partner should disclose their decision to opt out, in writing, to the partnership.

Getting an audit-defensible QSBS attestation letter

When it comes to taxes, the burden of proof is on you, the taxpayer. Years after your sale, the IRS could ask you to prove that your original stock met all the necessary QSBS requirements. Without proper documentation, this can be a difficult and stressful process.

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. This proactive step provides invaluable peace of mind.

As Anthony Cimino, former Head of Policy at Carta, explained during the 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 provides that clarity, creating 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, helping you substantiate your claim and address potential issues early if eligibility changes.

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

An exit is a major milestone, but for many founders, it's also the launchpad for what comes next. While tax rules can feel complex, understanding strategies like the QSBS rollover empowers you to make smarter decisions.

Carta is here to be the partner that provides the expertise for every stage of your journey. Get expert guidance and dedicated support to make the most of your QSBS eligibility—request a demo today.

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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.