Combining the benefits of the Section 1202 capital gains tax exclusion and Section 1045 rollover gain nonrecognition can formulate the rocket fuel needed to boost your tax savings vehicle. Under Section 1202 a taxpayer is allowed a tax exclusion of $10 million or 10x the initial QSBS investment. If the QSBS is sold early and the Section 1045 rollover is elected the taxpayer can defer taxes on the full gain even if it is above the QSBS tax exclusion cap.
Lets walk through a scenario:
If an angel investor purchased $1 million in QSBS in 2015 and then sold the QSBS in 2018 for $15 million there would be a $14 million gain recognized, which is above the QSBS tax exclusion cap. The Section 1045 rollover allows the investor to reinvest all of the $15 million into more QSBS, shielding the full gain until it sold again.
What happens when the investor sells the $15M that was rolled forward?
This article does not constitute legal or tax advice. Please consult with your legal or tax advisor with respect to your particular circumstance.