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Therefore, the “self-made intangibles” exclusion is likely to be broadly construed to include most forms of intellectual property and this exclusion furthers that broad purpose. In effect, the new tax scheme alters the pricing and value of a patent.Ĭongress’s intent regarding the capital gains tax is that profits and losses arising from everyday business operations be characterized as ordinary income and loss, not capital gains. To net the same amount of after-tax dollars following a sale, owners of self-created intellectual property must seek a higher purchase price to offset the higher tax treatment.
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Under the new Act, entrepreneurs and individual inventors possessing newly designed, self-made technologies will not be eligible for the lower capital gains rate when they create a company from that technology or sell the technology to another who will create a company. Under the previous tax scheme, a partnership’s sale of assets could be eligible for the long-term capital gains rate. In practice, this will dramatically alter if and how a seller chooses to dispose of these assets.īefore, sellers would be encouraged to sell self-made intellectual property however, under the new scheme, sellers are less encouraged to sell these assets because they will be subjected to a significantly higher tax rate.
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“This new tax law amends IRC Section 1221(a)(3), resulting in the exclusion of a patent, invention, model or design (whether or not patented), and a secret formula or process that is held either by the taxpayer who created the property or a taxpayer with a substituted or transferred basis from the taxpayer who created the property (or for whom the property was created) from the definition of ‘capital asset.’ As a result of this exclusion, gains or losses from the sale or exchange of a patent, invention, model or design (whether or not patented), or a secret formula or process that is held either by the taxpayer who created the property or a taxpayer with a substituted or transferred basis from the taxpayer who created the property (or for whom the property was created) will not receive capital gains treatment.”Įffectively, the sale of self-made intellectual property typically will now be subject to the higher top individual tax rate of 37 percent, as opposed to the capital gains tax rate of 20 percent.
IRC 1221 CODE
However, Section 1221 of the Internal Revenue Code under the new law exempts self-created intellectual property from capital gains treatment. Under the prior tax scheme, self-created intellectual property would have been subject to the capital gains tax rate following sale of those assets. In relevant part, this Act introduces one provision that removes a favorable tax rate for innovators with self-created intellectual property and eliminates the ability to treat certain self-created intellectual property as capital assets. This act introduces the most sweeping tax changes in decades lowering individual and corporate tax rates, with one stated goal of allowing buyers to write off the costs of new investments. A New Exclusion from the Capital Gains Rate: Self-Created Intangibles