Part of the genius of QSBS qualifications, regulations, and incentives is how they encourage the recycling of capital into the early-stage business ecosystem to drive innovation, create jobs, and strengthen the national economy. This effective reuse of QSBS eligible investments is made possible through the benefits laid out in a sister provision of the QSBS tax code, IRC Section 1045. A struggle in effectively rolling over gains through Section 1045 has long been that such rollovers are required to be made within 60 days of the gain. However, the conditions laid out in Section 1045, along with the growth in equity crowdfunding platforms over recent years, offer a viable solution for saving and prolonging eligible QSBS benefits for qualifying venture capital investors, which further contributes to maintaining a healthy and flourishing startup marketplace.
What is IRC Section 1045?
Section 1045 enables taxpayers who have not met the 5-year holding period for their QSBS tax exclusion to rollover their proceeds into other QSBS stock. This provision allows an investor to satisfy the 5-year holding period and maintain QSBS eligibility, as long as their gains rollover into a new QSBS eligible company. Essentially, this means an investor does not have to lose their QSBS capital gains tax exemption when a sale happens that is out of their control.
The caveat to this provision is that an investor only has 60 days from the date of their gain to complete this stock rollover. This challenge often leaves investors at a loss for effectively rolling over their gains. However, this is where the benefits of investing on crowdfunding platforms could aid investors in quickly rolling over their investments into other qualified QSBS companies and maintaining QSBS eligibility.
1045 Rollovers and Crowdfunding:
As laid out above, QSBS benefits could be jeopardized if an equity investor realizes a gain before holding that security for 5-years. While Section 1045 allows QSBS tax benefits to be salvaged, equity investors must rollover their gains into a QSBS eligible company all within 60-days.
For this very reason, crowdfunding investment opportunities made on crowdfunding platforms such as Wefunder, SeedInvest, StartEngine, and others could be a solution for many QSBS eligible investors looking for a QSBS qualified company to roll their gains into quickly. Equity crowdfunding platforms also give investors the profitable opportunity to identify corporations that qualify for QSBS and companies that are currently raising funds for a potential rollover prospect.
QSBS and Rollover Crowdfunding Investments:
Often, startup companies raising funds on crowdfunding platforms are in the beginning stages of their business lifecycle. Additionally, a vast majority of these crowdfunded startups have not yet reached the $50 million gross asset threshold, a primary QSBS eligibility qualification.
Crowdfunding investment opportunities give accredited and non-accredited investors the ability to invest in these early-stage companies and allow crowdfunding equity investors to utilize QSBS tax benefits for tax-free gains if eligibility criteria are met.
Many crowdfunded companies are QSBS eligible, but the QSBS tax code is highly nuanced and detailed, creating a need for investors to thoroughly research current and potential crowdfunding investments to ensure eligibility over time.
While rolling over QSBS gains into eligible crowdfunding investments is a highly effective utilization of the Section 1045 provision, some additional hurdles must be overcome to make this provision work to maintain QSBS eligibility for equity investors.
Hurdle 1: Performing Proper Due Diligence on Crowdfunding Investments Within a 60-Day Timeframe
Conducting a thorough due diligence process is essential for investors rolling over QSBS gains by utilizing the Section 1045 provision. This can be a lengthy process. However, many startups funded on crowdfunding platforms give investors access to a data room. A data room is a digital space where investors can access detailed information about the company to aid them in evaluating the viability of the investment opportunity.
Hurdle 2: Determining QSBS Eligibility for Crowdfunding Investment Opportunities
To date, crowdfunding platforms do not denote if specific companies or certain crowdfunded investment opportunities qualify for QSBS exemptions. This is where a QSBS assessment can be highly beneficial, and this is where our team of QSBS experts at CapGains can assist.
Along with that, companies often make QSBS representations in their share purchase agreements. However, it is important to note that these representations may, at times, be stated with limited evidence to back the company’s claim.
Investors can also contact the crowdfunded company’s management team to inquire about specifics of their QSBS eligibility.
If you need help now in navigating how and where to rollover your QSBS eligible stock, our team here at Capgains.com can help. We can help ensure that you know the options available to you in order for your stock to remain QSBS eligible.
Here at Capgains.com, we specialize in helping equity investors and corporations navigate QSBS tax exemption qualifications through ensuring shares are QSBS eligible and through monitoring eligible stock over time. Our team of experts is available and ready to provide support throughout the entire lifetime of your QSBS eligible stock.
This article does not constitute legal or tax advice. Please consult with your legal or tax advisor with respect to your particular circumstance.
