Scenario I: QSBS exchanged for QSBS
If QSBS was exchanged for other QSBS under a Section 351 transaction or a Section 368 Reorganization than the built-in gain on the transfer is eligible to be deferred under Section 1045 as well as any gain on the sale of the transferred. The above mentioned tax-free transactions treat the transferred QSBS as if it was the original QSBS; therefore, any gains on the sale of the QSBS post-tax-free transfer will be deferred under Section 1045 and excluded under Section 1202.
Scenario II: QSBS exchanged for non-QSBS
If QSBS is exchanged for non-QSBS under a Section 351 transaction or a Section 368 Reorganization the built-in gain on the transfer is eligible for a Section 1045 rollover, but any accrued gains post-tax-free transaction will not be. Section 1202 states “only to the extent of the gain which would have been recognized at the time of the transfer”, referring to the gain on the exchange of QSBS for non-QSBS; therefore, any gain after the exchange does not qualify as QSBS and will not be recognized for a Section 1045 rollover.