Legal & Compliance
Section 1045 Rollover
Last updated
Quick Answer
A tax provision allowing investors to defer capital gains from selling QSBS by reinvesting proceeds into new qualified small business stock within 60 days.
Section 1045 of the Internal Revenue Code provides a rollover mechanism for investors who sell Qualified Small Business Stock (QSBS) before meeting the five-year holding period required for the Section 1202 exclusion. If the investor held the QSBS for at least six months and reinvests the proceeds into new QSBS within 60 days, they can defer the capital gains tax. The holding period of the original stock carries over to the replacement stock, helping investors eventually reach the five-year threshold. This provision is only available to non-corporate taxpayers such as individuals and pass-through entities.
In Practice
An angel investor sells her QSBS in Startup A after holding it for three years, realizing a $2 million gain. Within 60 days, she reinvests the proceeds into QSBS in Startup B. She defers the $2 million gain under Section 1045, and the three-year holding period from Startup A carries over, meaning she only needs to hold Startup B's stock for two more years to qualify for the full Section 1202 exclusion.
Why It Matters
Section 1045 gives investors flexibility to exit a QSBS position early without triggering an immediate tax bill, as long as they redeploy into another qualifying startup. This is especially valuable for active angels who rotate through multiple early-stage investments.
Frequently Asked Questions
What is Section 1045 Rollover in venture capital?
Section 1045 of the Internal Revenue Code provides a rollover mechanism for investors who sell Qualified Small Business Stock (QSBS) before meeting the five-year holding period required for the Section 1202 exclusion.
Why is Section 1045 Rollover important for startups?
Understanding Section 1045 Rollover is critical for founders navigating the fundraising process. It directly impacts deal terms, valuation, and the relationship between founders and investors.
What category does Section 1045 Rollover fall under in VC?
Section 1045 Rollover falls under the legal category in venture capital. This area covers concepts related to the legal frameworks and compliance requirements in venture capital.
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