Capital Gains Tax on a Business Sale: What You’ll Owe and How to Plan for It

Selling your business is a big win, but your take-home depends on how you handle taxes. Most owners eventually need to pay capital gains tax, and capital gains tax on business sale is often the largest line item. This guide explains how capital gains work in a sale, what drives your bill, and the strategies our team at Baton uses with owners every day to plan smarter and keep more.

Quick note: This is general guidance. Always coordinate with a qualified CPA or tax advisor for your specific situation.

Capital Gains 101: What Counts and Why It’s Different in a Sale

Before we get tactical, it helps to know the basics. Capital assets are anything you own for investment or business purposes, and capital gains are the profit when you sell an asset for more than your basis (what you paid, adjusted over time). 

In a business exit, you might sell stock/units (an equity or “stock” sale) or all the assets of the business (an “asset” sale). Each path can change what’s taxed, and at what rate, creating different tax implications and tax consequences.

As of the 2025 tax year, federal long-term gains rates remain 0%, 15%, or 20% depending on taxable income, while short-term gains (assets held less than a year) are taxed at ordinary rates. In other words, if you have had your business or investment for more than a year, you typically get favorable treatment. 

The IRS maintains and updates the exact thresholds; refer to the current brackets in Topic No. 409: Capital Gains and Losses. High-income sellers may also be subject to the 3.8% Net Investment Income Tax, which is calculated on their modified adjusted gross income (AGI).

In an asset sale, the IRS treats each class separately, inventory and accounts receivable are ordinary income, equipment can trigger depreciation deductions (and recapture), while goodwill typically qualifies for capital gains treatment. The IRS page on Sale of a Business spells out how assets are categorized and taxed for tax purposes.

Stock Sale vs. Asset Sale: How Structure Shapes Your Tax Bill

Choosing (or negotiating) the right structure is one of your biggest levers for tax considerations. 

Here’s the practical impact and why it matters:

• In a stock sale, you’re typically taxed at capital gains rates on your equity, often the simpler and more tax-efficient path for small business owners.

• In an asset sale, the purchase price allocation across asset classes drives what’s taxed as ordinary income vs. capital gain. This directly affects how much tax you’ll owe.  If you’re weighing options, our breakdown of the sale of a business outlines what each structure means in terms of taxes, diligence, and risk transfer.

State taxes add another layer. Many states treat business sales taxed as ordinary income, while a few have unique rules (e.g., Washington’s state capital gains tax on certain long-term gains). Your state of residence and where the business operates can both matter; plan for it.

How Much You’ll Owe: Simple Scenarios (and the “Gotchas”)

This isn’t a substitute for a CPA’s model, but directionally, here’s how it plays out:

• Lower-to-mid income seller with a long-term gain: Much or all of the gain may fall into the 15% bracket (see IRS 2025 capital gains thresholds).

• High-income seller with a large gain: Expect portions taxed at 20% plus 3.8% NIIT on the lesser of your net investment income or the amount of your modified AGI that represents your taxable gain.

“Gotchas” to watch:

• Depreciation deductions and recapture on equipment/real property can be taxed up to ordinary rates

• Ordinary-income items (inventory, A/R) reduce the capital-gains portion in an asset sale

• State overlays (e.g., surtaxes or special rules) can create significant tax implications

If you want a quick directional estimate of your business sale tax and tax liability, try Baton’s business sale tax calculator and then confirm with your CPA.

Real-World Moves That Lower Your Bill

Baton’s advisors have run hundreds of valuations and exits this year alone, and a few themes keep showing up in successful tax outcomes. Here’s what they are.

Start Early (2–3 Years If You Can)

Many owners make the mistake of bringing in their accountant too late. Ideally, you want to start planning two to three years out. 

That head start creates room to clean up financials, tune compensation, and structure for the most favorable tax treatment, including options like trusts or QSBS (more details below).

Use Deal Terms as Tax Tools

Seller financing and earn-outs aren’t just negotiation levers; they also shape when income is recognized. Properly structured installment sales spread recognition over payment years, which can keep you in lower brackets and reduce the NIIT hit. Review our primer on IRS rules and seller financing, and consult with your CPA before signing.

Match Method to Business Reality

Fast-growth companies may justify a higher selling price via cash-flow projections, but most sub-$10M deals still anchor on historical multiples. Accurate adjusted cash flow remains the foundation for realistic pricing and a smoother diligence process that helps avoid unpleasant tax consequences.

Proven, Legal Strategies to Minimize or Defer Capital Gains

Here are several strategies that owners and their CPAs often use to minimize capital gains taxes or defer them.

Installment Sale (Seller Financing)

When you take payments over time, you generally recognize the gain as you receive it, which can lower annual taxable income. This structure lets sellers defer paying taxes into future years. Get familiar with IRS guidance on installment treatment via NIIT Q&As and sync structure with your advisor. We also cover practical mechanics in our seller-financing explainer.

Qualified Small Business Stock (QSBS)

If you sell qualifying C-corp stock held >5 years, Section 1202 may exclude up to 100% of the gain, subject to caps. Recent 2025 updates expanded certain benefits; for details, see reputable summaries from national firms like Frost Brown Todd’s QSBS walkthrough and Grant Thornton’s update, then confirm eligibility with counsel.

Charitable Remainder Trust (CRT)

A CRT can defer gain, generate an income stream, and support charitable goals, sometimes even creating a partially tax-free payout for beneficiaries. Start with the IRS descriptions of charitable remainder trusts and their technical guide, then have your estate attorney model the numbers to ensure accuracy.

Real Estate 1031 (If Applicable)

If your exit includes investment real estate, a properly executed 1031 exchange can defer gains by reinvesting into like-kind property. It also allows you to offset capital gains with new property investments. In some cases, a properly structured tax-free merger may also qualify, provided IRS conditions are met. 

Note: This applies to real property, not goodwill or operating assets. Coordinate closely with a qualified intermediary and your CPA.

Execution Details That Protect Your Outcome

Even great strategies fail without clean execution. 

Two places owners win or lose:

• Purchase price allocation (PPA): In asset deals, the PPA splits the price among inventory, equipment, IP, and goodwill. Higher allocations to goodwill generally increase capital-gains treatment for sellers, while both the buyer and seller must report the same allocations to the IRS. Buyers may push for more depreciable assets because that affects how the buyer pays taxes going forward. Understand the trade-offs and document the logic. Baton’s guide to taxes when selling a business explains how PPA drives different tax buckets.

• Documentation and diligence readiness: Lenders and buyers care about verified numbers. Your tax plan is only as strong as your bookkeeping and add-back support. Clean records reduce surprises when it comes to paying taxes after the deal closes. Let’s be blunt: Clean financials and a well-documented business separate the sellers who close from those who stall. Accurate reporting also ensures that any capital losses can be applied against gains for tax savings. If you need a refresher on valuation factors that also impact taxes at exit, see how to determine fair market value before selling. Make sure allocations and gain calculations tie directly to your financial statements and your tax return.

Timing, Markets, and State Nuances

You can’t control tax law, but timing within the calendar year and broader market conditions do matter:

• Calendar timing can affect which brackets you land in; your filing status (single vs. married filing jointly) also changes the effective tax rate. The IRS issues annual inflation adjustments that shift thresholds year to year.

• State policy shifts can change your net. For instance, states periodically add or adjust capital-gains rules (examples include Washington’s state CGT). Keep tabs on your state(s) with your CPA.

Other income sources, such as interest from savings accounts, may also impact your bracket in the year of sale. Some installment-sale structures even route payments through general deposit accounts to manage the timing of income recognition.

The Baton Way: Price Right, Plan Taxes Early, Close With Confidence

Baton helps owners align valuation, deal support, and tax planning, so you don’t miss opportunities due to delays. If you’re even 12–36 months out, get a free, data-driven valuation now and build a plan with experts who’ve seen hundreds of small-business exits in the last year.

If you’re considering a sale in the next 1–3 years, Baton offers a free valuation and planning session to help you understand taxes, structure, and pricing upfront.