Section 1045 states that any “gain from such sale shall be recognized only to the extent that the amount realized on such sale exceeds the cost of any QSBS purchased by the taxpayer during the 60-day period beginning on the date of such sale, reduced by any portion of such cost previously taken into account under this section”; therefore, any gains on the proceeds from the sale of QSBS can be rolled over. A taxpayer purchased the original QSBS for $1M and sold it for $15M in five years, realizing a gain of $14M on the proceeds. The taxpayer decides to take the $10M gain exclusion and roll the rest of the proceeds into new QSBS worth $5M; therefore, the deferred gain would be $4M ($5M – $1M). The gain on the proceeds used to purchase the replacement QSBS would not qualify for Section 1202. Section 1045 states “If the gain from any sale is not recognized by reason of subsection (a), such gain shall be applied to reduce (in the order acquired) the basis for determining gain or loss of any QSBSwhich is purchased by the taxpayer during the 60-day period“, meaning the replacement QSBS of $5M would be lowered by the non-recognized gain of $4M for determining the gain or loss basis for Section 1202. Therefore, the basis in the replacement stock for Section 1202 would be $1M.

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