Most owners assume that if they sell something they built and held for years, the gain is long-term capital gain.
Sometimes that is true. Sometimes it is exactly wrong.
There is a narrow rule that can treat gain from certain self-created intangible assets as ordinary income, even when the buyer calls it “IP” and the deal feels like a classic long-term investment exit. This shows up at the worst moment: when the LOI is signed, the purchase agreement is moving fast, and the buyer’s allocation language is already in the draft.
The problem in one sentence
If you are the creator of certain intangibles, the asset may not be treated as a capital asset when you sell it, which can push gain into ordinary income territory.
Quick decision map before you sign
Start here:
Are you selling something you personally created (or something your basis traces back to the creator)?
If yes, keep going.Is the value tied to a protected or creative right (like a patent, invention, design, formula, process, or certain authored works)?
If yes, ordinary income risk increases.Is the buyer’s allocation pushing value into that bucket instead of goodwill, customer relationships, or going concern?
If yes, you need a review before the allocation hardens.
Self-created items that commonly trigger the problem
This risk most often shows up with assets tied to personal creation, such as:
Patents created by the taxpayer
Inventions, models, or designs created by the taxpayer
Secret formulas or processes created by the taxpayer
Copyrights and certain creative works created by the taxpayer
Similar authored or prepared property tied directly to the creator
The trap that surprises owners
Owners often assume that moving the intangible into an entity fixes the character.
It does not always.
If the intangible was transferred in a way that carries over the creator’s basis, the “creator character” issue can follow the asset. Translation: You may still be staring at ordinary income treatment when the asset is later sold.
The part most owners miss: not every intangible is the problem
Many common business intangibles can still qualify for capital gain treatment, such as:
Customer lists and prospect lists
Goodwill and going concern value
Workforce in place
Business books and records
Operating systems and internal processes as business property
Supplier relationships and favorable contracts
Similar items treated as property
So the real issue is not “intangibles are ordinary income.” The real issue is:
Which intangible, created by whom, held how, and valued where in the allocation.
Why this matters before you sell
Two levers tend to matter most in real life:
Deal structure and documentation
Purchase price allocation
If the allocation loads value into an asset category that gets ordinary treatment, your tax cost can jump. If the allocation is thoughtful and supportable, the outcome can improve.
Pressure test before LOI or purchase agreement
Ask these early, not at closing:
What exactly are we selling: entity interests, specific assets, or both?
Which intangibles are driving price: goodwill, customer relationships, software, patents, brand, and content library?
Who is the creator, and how has the asset been held for tax purposes?
Is there any structure where the basis or character carries over from the creator?
Does the buyer’s draft allocation push value into a category that could be ordinary income?
Do we have a clean description and documentation of what the intangible actually is?
The simplest next step
If a meaningful part of your sale price is tied to something you created, this should be reviewed before you agree to allocation language.
Reply with one sentence: “Intangible sale review” and what you are selling (example: software, patent, customer list, content library, brand). Contact us today.
(Disclosure: Educational only, not tax or legal advice.)