Having a solid understanding of the sale of customer lists, and the related capital gains, is an important part of selling a business. As an expert business broker, I’m here to explain the ins and outs of selling a customer list and what capital gains may be involved.

Is Sale of Customer List a Capital Gain?

An interest in a partnership or joint venture is treated as a capital asset when sold. The part of any gain or loss from unrealized receivables is taxed as capital gains. The income tax ramifications of the sale of the intangible assets (goodwill, customer list) are capital gains in nature to the seller, and are deductible to the buyer. Any gains on property held for one year or less, inventory, or accounts receivable are taxed at ordinary income rates. Amounts paid under non-compete agreements are also taxed as ordinary income. Amounts received for goodwill result in capital gain, while payments for services result in ordinary income.

The existence of goodwill is a key factor in determining whether or not the proceeds from the sale of a customer list will be taxed as a capital gain. As such, the increased revenue as a result of customer loyalty cannot be treated as a capital gain. Special considerations must be taken into account when it comes to intangible property, such as customer lists. Internal Revenue Code Section 1.1221-1(c)(2) suggests a customer list probably doesn’t meet the definition, so it would still be a capital asset. If a customer list is sold, it would likely be taxed as a capital gain.

Key Takeaways

  • An interest in a partnership or joint venture is treated as a capital asset when sold.
  • The income tax ramifications of the sale of the intangible assets (goodwill, customer list) are capital gains in nature to the seller, and are deductible to the buyer.
  • Amounts received for goodwill result in capital gain, while payments for services result in ordinary income.
  • The increased revenue as a result of customer loyalty cannot be treated as a capital gain.
  • Internal Revenue Code Section 1.1221-1(c)(2) suggests a customer list probably doesn’t meet the definition, so it would still be a capital asset.
  • If a customer list is sold, it would likely be taxed as a capital gain.

While the sale of a customer list may result in capital gains, it is important to understand the nuances of the sale, and to seek appropriate legal advice. Matthew E. Rappaport, Esq. is an excellent resource for understanding the complexities of this situation.

When selling a business, it is essential to have the right information to make informed decisions. Atlantabusinesses.com is a great resource for answers to all your questions about selling a business, and about business brokers. Check it out today to get the help you need.

Does a customer list qualify as a 1231 asset?

Section 1231 assets are exchanges of real estate like leasehold improvements, depreciable property used in a business and held for more than a year (which is usually for generating rental or royalty income), and Section 197 intangibles like goodwill, customer lists, and copyrights.

What are three items of sale that are subject to capital gains tax?

Examples of capital assets include a residence, items used for personal use such as furniture, and securities such as stocks and bonds that are held as investments. The difference between the adjusted cost basis of the asset and the amount received from the sale is a capital gain or loss.

Does the sale of business goodwill constitute a capital gain?

It has been ruled by a few recent Tax Court decisions that goodwill is to be regarded as a personal asset, which results in the sale of such assets being considered as a capital gain and taxed at a lower rate, as opposed to the traditional view that it is a business asset.

Do capital gains arise from the sale of intangible assets?

Realizing a capital gain means that when an intangible asset such as a patent or musical composition is sold for a higher price than its original purchase price, it is taxed at the capital gains rate.