Buyers usually want an asset sale; sellers usually want a stock sale. The difference is how much of the price is taxed as ordinary income instead of capital gain, and, for a C corporation, whether the money is taxed once or twice. The entity type and the purchase price allocation decide most of it.
One page that shows every tax layer on your sale: federal capital gains, depreciation recapture, the 3.8% net investment income tax, and state tax.
Short answer
| Asset sale | Stock (or membership interest) sale | |
|---|---|---|
| What is sold | The company sells its equipment, inventory, contracts and goodwill | The owner sells the shares; the company keeps everything, including its history |
| Buyer's view | Preferred: new basis in the assets to depreciate and amortize, fewer inherited liabilities | Less attractive: no new basis, takes on past liabilities |
| Seller's tax | Each asset taxed by its own character: some ordinary income, some capital gain | Usually all long-term capital gain |
| C corporation | Taxed twice: 21% at the company, then again when the cash is paid out | Taxed once, at the shareholder level |
| S corporation or LLC | Taxed once (passes through), but character follows each asset | Taxed once; LLC interest sales still pull out ordinary income for "hot assets" |
Asset sale: where the price goes
In an asset sale, buyer and seller allocate the price across seven classes and both report it on IRS Form 8594 with the return for the year of sale (IRC 1060, residual method). The same dollar can be taxed at 20% or at 37% depending on where it lands.
| What the price is allocated to | Seller's tax character |
|---|---|
| Cash, receivables (Classes I to III) | Usually little gain; receivables of a cash-basis business are ordinary income |
| Inventory (Class IV) | Ordinary income on any gain |
| Equipment, vehicles, furniture (Class V) | Gain up to past depreciation is ordinary income (Section 1245 recapture); any excess is Section 1231 gain |
| Buildings (Class V) | Gain from past straight-line depreciation taxed at up to 25%; the rest capital gain |
| Non-compete, customer lists, licenses (Class VI) | Non-compete payments are ordinary income to the seller; other self-created intangibles are generally capital |
| Goodwill and going concern (Class VII) | Long-term capital gain for self-created goodwill held more than a year |
| Consulting or employment agreement (not part of the price) | Ordinary income plus payroll or self-employment tax |
Buyers prefer more allocated to equipment (fast write-offs) and less to goodwill (15-year amortization, IRC 197). Sellers prefer the reverse. It is negotiated, and it should be written into the purchase agreement.
Worked example
Owner's basis in the company (stock) $300,000, equal to the company's basis in its assets. Asset sale allocation: equipment $400,000 (adjusted basis $100,000, so $300,000 of recapture), inventory $200,000 (at cost), non-compete $150,000, goodwill $2,250,000. Seller assumed to be in the top bracket; state tax not included.
| Structure | How it is taxed | Federal tax | Seller keeps |
|---|---|---|---|
| S corp or LLC, stock or interest sale | $2,700,000 long-term gain at 20% | $540,000 | $2,460,000 |
| S corp or LLC, asset sale | $450,000 ordinary (recapture + non-compete) at 37%; $2,250,000 goodwill at 20% | $616,500 | $2,383,500 |
| C corp, stock sale | $2,700,000 gain at 20% + 3.8% NIIT | $642,600 | $2,357,400 |
| C corp, asset sale then liquidation | $2,700,000 at 21% inside the company ($567,000), then $2,133,000 liquidation gain at 23.8% ($507,654) | $1,074,654 | $1,925,346 |
Illustrative and rounded. Rates: 37% top ordinary rate and 20% top long-term rate (IRC 1(j) and 1(h), brackets per IRS Rev. Proc. 2025-32 for 2026; the 37% top rate was made permanent by Pub. L. 119-21, July 4, 2025); 21% corporate rate (IRC 11(b)); 3.8% NIIT (IRC 1411). The S corp and LLC rows assume an owner who materially participates, so NIIT generally does not apply to the business gain (IRC 1411(c)(4)); a passive owner would add 3.8%. C corp stock gain is investment income and carries the 3.8%.
The entity rules, briefly
Read selling a business: the taxes, or run your numbers in the free capital gains tax calculator.
Common questions
Usually a stock sale: the gain is generally all long-term capital gain and, for a C corporation, taxed only once. Asset sales can turn part of the price into ordinary income through depreciation recapture and non-compete payments.
The buyer gets a new tax basis in the assets to depreciate and amortize, and leaves most of the company's past liabilities behind.
The IRS form both buyer and seller file to report how the price of a business sold as assets was allocated across seven classes, from cash to goodwill. The allocations should match.
A joint election that treats a qualifying stock purchase of an S corporation or a subsidiary as an asset purchase for tax. The buyer gets asset basis; the seller is taxed as if assets were sold.
Self-created goodwill held more than a year is generally long-term capital gain to the seller. A non-compete payment is ordinary income.
Related: Selling a business: the taxes · Capital gains tax calculator · Depreciation recapture calculator · QSBS Section 1202
Audit trail
Reviewed for the Retirement Literacy Foundation, a 501(c)(3) education nonprofit. Prepared by Hans Goldstein, retirement educator; IRS Special Enrollment Examination Parts 1, 2 and 3 passed, enrollment pending. Informational only. Not tax, legal or investment advice. Every figure below cites its source so your CPA or attorney can check it.
Figures are 2026 federal amounts unless stated. Examples are illustrative and rounded; your numbers will differ. By Hans Goldstein, founder, Retirement Literacy Foundation. Last reviewed .
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