The short answer
Only the part that section 1202 leaves taxable. Gain excluded under section 1202 never enters gross income, and Reg. section 1.1400Z2(a)-1(b)(11) asks for gain that would otherwise be recognized and taxed, so there is nothing to defer on that slice. What remains, such as gain above the per-company cap or the non-excluded share for stock held three or four years, is capital gain and can go into a qualified opportunity fund within 180 days of the sale. That remainder keeps its character, including the 28% rate that applies to the non-excluded share. A separate route, the section 1045 rollover into other small business stock within 60 days, may suit sellers who want to stay in startups.
At a glance
| Excluded gain | Not in gross income, so not eligible gain for a fund |
|---|---|
| Stock acquired after July 4, 2025 | 50% excluded at three years, 75% at four, 100% at five or more |
| Older stock | Exclusion depends on the acquisition date; more than five years' holding is required |
| Per-company cap | Greater of $10,000,000, or $15,000,000 for newer stock, and 10 times basis |
| Taxable remainder | Capital gain, eligible for a fund if the buyer is unrelated |
| Character later | Non-excluded share returns as 28% rate gain; gain above the cap as regular long-term gain |
| Alternative | Section 1045: buy other qualifying stock within 60 days after six months' holding |
Gain that section 1202 excludes is never taxed, so a fund has nothing to defer
Section 1202(a)(1) says that for a taxpayer other than a corporation, gross income shall not include a stated percentage of gain from selling qualified small business stock. The exclusion is not elective; if the stock qualifies and the holding period is met, the excluded gain simply is not income.
The opportunity zone regulation defines eligible gain as capital gain that would be recognized and subject to federal income tax if the deferral did not apply. Excluded gain fails that test, and deferring it would gain nothing anyway. The fund conversation therefore starts only after you know how much of the sale the exclusion does not cover.
Section 1202(c) limits qualified small business stock to shares in a C corporation acquired at original issue for money, property or services, and section 1202(d) requires the company's aggregate gross assets not to exceed $75,000,000 before and immediately after issuance. Whether your shares meet those tests is a question for the company's records and your CPA, and it decides everything below.
Three kinds of gain stay taxable and can go into a fund
First, gain above the per-company cap. Section 1202(b) limits the gain taken into account for one issuer to the greater of 10 times your adjusted basis in the shares sold that year and a dollar limit: $10,000,000 for stock acquired on or before July 4, 2025, and $15,000,000 for stock acquired after it, each reduced by gain excluded in earlier years. Gain above that line is regular long-term capital gain.
Second, the non-excluded share. Section 70431 of Public Law 119-21 added a schedule for stock acquired after the July 4, 2025 enactment date: 50% excluded after three years, 75% after four and 100% after five. Older stock acquired before the 2010 change carries a 50% or 75% exclusion. The taxable share is capital gain, and section 1(h)(4) and (7) make it 28% rate gain.
Third, shares that miss the holding period or fail the qualification tests. Their whole gain is regular capital gain. Because stock acquired after July 4, 2025 cannot reach three years until July 2028, a sale of such shares before then produces no exclusion at all, and all of the gain is available for a fund.
Hypothetical: a $25,000,000 gain, $10,000,000 excluded, $15,000,000 for a fund
Round, hypothetical figures. You founded a company in 2018 and hold shares with a $500,000 basis that qualify for the 100% exclusion. An unrelated acquirer buys them on August 2, 2027 for $25,500,000, a $25,000,000 gain, and you have excluded nothing from this company before.
The cap is the greater of $10,000,000 and 10 times $500,000, which is $5,000,000, so $10,000,000 is excluded. The other $15,000,000 is long-term capital gain. Counting August 2 as day one, the 180-day window ends on January 28, 2028, and investing $15,000,000 in a qualified opportunity fund by then defers all of it under the five-year rule described in the rolling five-year deferral.
Investing $15,000,000 is a large, concentrated commitment to an illiquid private fund that can lose principal, so many sellers defer part and pay tax on the rest. You only need to invest the amount you want deferred, as gain or whole sale price explains. Work through the cap, the basis and the investment size with your CPA before the purchase agreement closes.
The section 1045 rollover is a different tool with a 60-day clock
Section 1045(a) lets a non-corporate seller of qualified small business stock held more than six months elect to recognize gain only to the extent the amount realized exceeds the cost of other qualified small business stock bought within 60 days. The deferred gain reduces the basis of the new shares, and the statute excludes gain treated as ordinary income.
The two routes suit different sellers. The rollover keeps you in operating startups that meet the same section 1202 tests and preserves the chance of a later exclusion; the fund takes a passive interest in zone property for at least five years and offers the ten-year exclusion on the fund's own growth. The rollover window is 60 days; the fund window is 180.
Both deferrals require a buyer who is not related under their own rules. For the fund, a sale to a family member or business partner explains the 20% test, which matters when the company buys back your shares and you own more than 20% of it.
Related questions
Can I skip the section 1202 exclusion and defer the whole gain in a fund instead?
No. The exclusion applies automatically to qualifying stock, so the excluded gain is not income and has no tax to defer. The fund can take only the taxable remainder.
Does the deferred 28% gain come back at 28%?
The regulation says included gain keeps the attributes it would have had, including those under section 1(h). Non-excluded section 1202 gain therefore returns as 28% rate gain when the deferral ends.
My shares are only two years old. Is any of the gain excluded?
Not under section 1202, which requires at least three years for stock acquired after July 4, 2025. The whole gain is regular capital gain, long-term if held more than a year, and eligible for a fund.
Is the 180-day window measured from the closing or from an escrow release?
From the day the gain is recognized for tax purposes. Escrowed or deferred payments may be reported under the installment method, which has its own start-date rule in what date starts the 180-day window.
Is crypto or public stock ever qualified small business stock?
Crypto is not stock. Public shares qualify only if acquired at original issue while the company met the $75,000,000 gross assets test, so stock bought on an exchange does not qualify; its gain is covered by stock and crypto gains in a fund.
Sources
Checked against these publications on October 8, 2026. Rules and figures change; confirm the current version with your CPA or attorney before you act. This page is general information, not tax or legal advice.
- 26 U.S. Code section 1202, Partial exclusion for gain from certain small business stock
- 26 U.S. Code section 1045, Rollover of gain from qualified small business stock
- 26 U.S. Code section 1, Tax imposed (subsection (h), maximum capital gains rate)
- Public Law 119-21, sections 70421 and 70431
- Reg. section 1.1400Z2(a)-1, Deferring tax on capital gains by investing in opportunity zones
- 26 U.S. Code section 1400Z-2, Special rules for capital gains invested in opportunity zones
- IRS, Opportunity Zones Frequently Asked Questions