Business Sale Under One Year: Short-Term Gains and Rate Planning

Selling within one year of acquisition triggers short-term capital gains taxed at ordinary income rates. Evaluate whether waiting justifies the tax savings.

Short-term gains are taxed as ordinary income. Under IRC Section 1222, gains on assets held one year or less are short-term capital gains, taxed at your ordinary income rate -- which can reach 37% federally. Add the 3.8% Net Investment Income Tax under Section 1411, and the combined federal rate can hit 40.8% before state taxes.

QSBS exclusion is off the table. Section 1202 requires you to hold qualified small business stock for at least five years. At under one year, you are not even close. There is no partial credit for shorter holding periods.

Planning options are limited but not zero. Installment sales under Section 453 can spread recognition across tax years. If the sale includes both asset classes and goodwill, purchase price allocation under Section 1060 determines what gets taxed at ordinary rates versus capital gains rates. Structuring the deal carefully still matters.

The tradeoff: Speed has a price. Selling this early means the highest possible tax rate on your gain, with almost no exclusions available to offset it. A CPA can model whether waiting even a few months changes the math significantly.