When selling your business, careful tax planning is essential to help lower the costs of the acquisition and minimize taxes for you as the seller. It's critical to understand the difference between short-term and long-term capital gains. Short-term capital gains, which come from assets held for a year or less, are taxed at your regular income tax rate. Long-term capital gains, from assets held for over a year, are taxed at a lower rate, but also include a 3.8% Net Investment Income tax. The structure of the sale—whether it's an asset sale or a stock sale—also has significant tax implications that will affect how much you take home from the deal.
Federal tax on a business sale turns on two facts: how long you held the interest, and how the deal is structured.
Hold stock or a partnership interest for more than one year and the gain is long-term. For 2026, the IRS taxes most long-term capital gain at 0%, 15%, or 20%, based on taxable income (Rev. Proc. 2025-32). Hold it one year or less and the gain is short-term. Short-term gain is taxed at ordinary income rates, which reach 37%. High earners also owe a 3.8% net investment income tax on the lesser of net investment income or the amount by which modified adjusted gross income exceeds $200,000 ($250,000 if married filing jointly). Those NIIT thresholds have not been indexed since 2013.
Structure changes the character of the gain. In a stock or equity sale, you generally report capital gain on the sale price minus your basis in the shares or membership interest. In an asset sale, the IRS treats the deal as a sale of each asset. Inventory, receivables, and depreciation recapture can be ordinary income. Goodwill and other capital assets can be capital gain. A C corporation that sells assets pays corporate tax first. The shareholders then pay tax again when the company distributes the cash.
State tax is a separate bill. California taxes capital gain as ordinary income and does not give a lower long-term rate. Other states do. If you live in a high-tax state, or you plan to move, timing and residency can change the after-tax result as much as the federal structure.
Two federal tools can change the year you pay. Qualified small business stock under section 1202 can exclude federal gain on a qualifying C corporation stock sale. The exclusion does not apply to an asset sale. The installment method under section 453 can spread eligible gain across later years. Depreciation recapture and inventory gain still land in the year of sale.
Model after-tax proceeds before you sign a letter of intent. Ask your CPA to run the same price as an asset sale and as a stock sale, with and without a seller note.