Do I pay capital gains tax when I sell my business?

Usually, on the portion of the price that exceeds your tax basis, for assets you held more than a year. Some of the price may instead be taxed as ordinary income, depending on what was sold and how the deal is structured.

Can I avoid capital gains tax on the sale of my business?

Not usually, but you can often reduce or delay it. Common approaches include an installment sale, careful allocation of the price across assets, and, for qualifying C-corporation stock, the section 1202 small business stock rules. Each has conditions, so plan with a CPA before you sign a letter of intent.

Does the 3.8% net investment income tax apply to selling my business?

It can. It applies above income thresholds of $200,000 (single) or $250,000 (married filing jointly), but whether a business sale counts as investment income depends on how actively you were involved in the business. Ask your CPA to check.

Capital Gains Tax on the Sale of a Business

The basic rule: long-term capital gains

The IRS treats most of what you sell as capital assets. If you held an asset for more than one year, your profit on it is a long-term capital gain. If you held it a year or less, the gain is short-term and taxed like ordinary income.

Long-term gains are taxed at three rates, depending on your total taxable income. For tax years beginning in 2025:

Rate	Single filers, taxable income	Married filing jointly, taxable income
0%	Up to $48,350	Up to $96,700
15%	$48,351 to $533,400	$96,701 to $600,050
20%	Above $533,400	Above $600,050

Source: IRS Topic no. 409. Thresholds adjust each year.

Because a business sale often pushes an owner’s income for that year well past these lines, much of a sale gain lands in the 20% bracket.

The extra 3.8%

The net investment income tax adds 3.8% for individuals whose modified adjusted gross income is above $200,000 (single or head of household) or $250,000 (married filing jointly). Whether your sale counts as investment income depends on how actively you participated in the business, so this is one to confirm with a CPA.

Asset sale vs. stock sale

How the deal is structured decides how the price is taxed.

	Asset sale	Stock (or membership interest) sale
What the buyer gets	Selected assets: equipment, customer lists, goodwill	Your shares, so the whole company, including its history
Who usually prefers it	Buyers	Sellers
Seller’s tax	Mixed: part capital gain, part ordinary income	Mostly long-term capital gain on the shares
Why	Buyer can depreciate the purchase price again and leaves old liabilities behind	Simpler, one rate, and liabilities go with the company

Many small business sales are structured as asset sales, particularly for sole proprietorships, partnerships and LLCs.

How an asset sale is split up

In an asset sale, the price is divided across classes of assets, and each class is taxed by its own rules. Both you and the buyer must report that split to the IRS on Form 8594 when goodwill is part of the sale, so you need to agree on it.

Goodwill (your reputation, customer relationships and brand) is generally taxed as a long-term capital gain. This is usually the biggest piece.
Equipment, vehicles and furniture you have depreciated can trigger depreciation recapture. The part of the gain that comes from earlier depreciation deductions is taxed as ordinary income, at your regular rate.
Inventory is taxed as ordinary income.
Real estate has its own rules, including a maximum 25% rate on unrecaptured section 1250 gain.

That’s why two offers at the same headline price can leave you with very different checks. An offer that puts more of the price into goodwill is usually better for you after tax, and an offer that puts more into equipment is usually better for the buyer.

If your business is a C corporation

An asset sale by a C corporation can be taxed twice: once at the corporate level when the company sells its assets, and again when the money is paid out to you. This is one of the main reasons C-corporation owners push for a stock sale.

Spreading the tax with an installment sale

If the buyer pays you over time, for example through seller financing, the sale can qualify as an installment sale: a sale where you receive at least one payment after the tax year of the sale. You then generally report the gain as payments come in, rather than all at once.

One catch: depreciation recapture is taxed in the year of sale, even if you haven’t received the cash yet. Plan for that bill.

What to do before you sign anything

Bring in a CPA before the letter of intent. Structure and price allocation are negotiated early and are hard to change later.
Estimate your after-tax proceeds for each offer, not just the headline price.
Know your basis. Your gain is the price minus your tax basis in the assets or shares, so dig out records of what you paid and what you’ve depreciated.
Check your state. Most states also tax capital gains, and the rates vary widely.