Asset Sale or Stock Sale? How Selling a Business Is Taxed
Why buyers want assets and sellers want stock, how entity type changes the math, and the elections that let both sides compromise.
Reviewed by the Fairlight Accounting cross-border tax team — U.S. & Canadian Tax Desks
In an asset sale, the buyer purchases the company's individual assets and the seller's gain is taxed asset by asset, partly as ordinary income. In a stock sale, the buyer purchases the owner's shares and the seller usually has a single long-term capital gain. Buyers generally prefer assets for the depreciation; sellers generally prefer stock.
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Why do buyers prefer asset purchases?
The buyer receives a new tax basis in each asset equal to the price allocated to it. Equipment can be depreciated again, often immediately under bonus depreciation, and goodwill and other intangibles are amortized over 15 years. The buyer also leaves behind most of the seller's historical liabilities. In a stock purchase, the company's old basis carries over and its history comes with it.
How does the seller's tax differ?
| Item | Asset sale | Stock sale |
|---|---|---|
| Character of gain | Mixed: capital or Section 1231 gain on goodwill and long-held business property; ordinary income on depreciation recapture, inventory, and receivables; up to 25 percent on unrecaptured Section 1250 gain from real estate | Generally long-term capital gain |
| C corporation seller | Corporation pays tax on the sale, then shareholders pay again on liquidation | One level of tax at the shareholder |
| S corporation or LLC seller | Gain passes through once (a former C corporation may also owe built-in gains tax); character follows the assets | One level; capital, except ordinary income for an LLC's receivables, inventory, and recapture (Section 751) |
| Buyer's tax basis | New basis in each asset | Old basis inside the company |
| Liabilities | Mostly stay with the seller | Stay with the company, so pass to the buyer |
The C corporation case is where the gap is widest: an asset sale can cost the owners two layers of tax.
How is the price allocated?
In an asset sale, both sides must allocate the price among seven classes of assets using the residual method — cash first, then securities, receivables, inventory, equipment and real estate, identifiable intangibles, and finally goodwill. Both buyer and seller report the allocation on Form 8594, and they should agree on it in the purchase contract. Sellers want more in goodwill (capital gain); buyers want more in equipment (fast depreciation).
What elections let the parties compromise?
- Section 338(h)(10) or 336(e). A stock sale of an S corporation or a corporate subsidiary that is treated for tax as a sale of the company's assets followed by a liquidation. Section 338(h)(10) needs a corporate buyer and a joint election on Form 8023; Section 336(e) works with any buyer and is elected by the seller and the company. The buyer gets the stepped-up basis; the seller gets single-level tax, with asset-sale character.
- F reorganization. An S corporation owner forms a new holding company, converts the old company into an LLC, and sells the LLC interests — legally simple for the buyer, taxed as an asset sale.
- Personal goodwill. In some service businesses, the owner's own relationships can be sold directly by the owner, avoiding corporate-level tax on that portion.
Frequently asked questions
Is a noncompete payment capital gain?
No. Amounts paid for a seller's covenant not to compete are ordinary income to the seller and amortized over 15 years by the buyer.
Does the 3.8 percent net investment income tax apply?
It applies to gain on C corporation stock whether or not the seller is active. For an S corporation, LLC, or sole proprietorship, gain from a business in which the seller materially participates is generally outside it, so the answer depends on the structure.
Can I spread the gain over several years?
Yes, if the buyer pays over time, an installment sale can defer gain — but depreciation recapture is taxed in the year of sale.
Who decides the structure?
The negotiation. Structure, price, and allocation are traded against each other in the letter of intent, which is why tax modeling belongs before that letter is signed.
Official sources
The IRS explains: “Both the seller and purchaser of a group of assets that makes up a trade or business must use Form 8594 to report such a sale if: goodwill or going concern value attaches, or could attach, to such assets and the purchaser's basis in the assets is determined only by the amount paid for the assets.” — Internal Revenue Service, About Form 8594, Asset Acquisition Statement Under Section 1060, https://www.irs.gov/forms-pubs/about-form-8594
The IRS explains: “The sale of a trade or business for a lump sum is considered a sale of each individual asset rather than of a single asset.” — Internal Revenue Service, Publication 544 (2025), Sales and Other Dispositions of Assets, https://www.irs.gov/publications/p544
Next step
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