Most founders are familiar with Section 1202—the potential capital gains exclusion on a startup exit. But a common question arises: what happens if you exit in year three?

With the passage of the One Big Beautiful Bill Act (OBBBA), the rules for Qualified Small Business Stock (QSBS) have shifted meaningfully. While the new law allows you to claim a partial exclusion earlier than the traditional five-year mark, Section 1045 remains a critical bridge that many founders overlook. It allows you to defer capital gains if you sell QSBS early and reinvest the proceeds into new QSBS within 60 days. This strategy essentially "buys you time," allowing you to maintain your momentum without triggering a significant tax bill today.

How it works

Your original stock must meet all QSBS requirements, and you must have held it for at least 6 months. From the date of sale, you have exactly 60 days to reinvest the proceeds. The new investment must be made at the "issuer level"—meaning you're buying directly from the company, not on a secondary market. Here's the critical detail: to defer 100% of the gain, you must reinvest the entire proceeds of the sale, not just the profit. Any cash you "take off the table" becomes taxable immediately.

Why this matters in 2026

The OBBBA introduced a "Dual-Track" system that changes how you pick your next investment. If you're buying into a new startup today (post-July 4, 2025), that company can have up to $75 million in gross assets—up from the old $50M limit. That number is now indexed for inflation annually, allowing the threshold to adjust with economic conditions.

The exclusion ladder has changed too. We used to have a 5-year "cliff" for any tax benefit. Now, for stock issued after July 4, 2025, you can exclude 50% at 3 years and 75% at 4 years. A 1045 rollover "tacks" your old holding period onto the new shares, helping you climb that ladder faster.

The stakes are higher as well—the lifetime exclusion cap for new issuances has jumped from $10M to $15M, also indexed for inflation.

Common misconceptions

This isn't a 1031 exchange—like for real estate—the rules and 60-day timelines are much tighter. On the asset test timing, you only have to pass the gross asset test ($50M or $75M+) at the moment the stock is issued. If the company hits a $1B valuation the next day, you're still golden.

And it's a deferral, not a wipeout. You're rolling your tax basis into the new stock, and you still want to hit that total 5-year mark to eventually claim the full 100% Section 1202 exclusion.

Section 1045 preserves your path to the federal capital gains exclusion when an exit happens faster than planned. Without proper planning, an early liquidity event can trigger significant tax consequences that could have been deferred.

Educational only. QSBS planning is highly fact-specific and requires coordinated tax and legal advice.