The transfer of a patent by an individual is treated as long term capital gain if certain conditions explained below are met. Section 1235 of the Internal Revenue Code treats such sales of patents as a sale or exchange of a capital asset held longer than 1 year and as a result eligible for favorable long term capital gain treatment.
This long term capital gain treatment applies to your transfer of a patent if you meet all the following conditions.
The following discusses some of these conditions in more detail:
You are the holder of a patent if you are either of the following.
All substantial rights to patent property are all rights that have value when they are transferred.
All substantial rights to a patent are not transferred if any of the following apply to the transfer.
The payment may be made in lump sum, periodically during the transferee’s use or are contingent on the productivity, use, or disposition of the patent and still qualify for long term capital gain treatment.
Note that holding a security interest (such as a lien or pledge), or a reservation calling for forfeiture for nonperformance, is not treated as a substantial right for these rules and may be kept by you as the holder of the patent.
This favorable long term capital gain tax treatment does not apply if the transfer is directly or indirectly between you and a related person. These related party rules can be extremely complex so care should be exercised before considering any sale with a related party.
The following is a list of related persons.
The important point here is that if a gain is recognized on the sale or exchange of the patent to a related person, the gain may be ordinary income even if the property is a capital asset.
The above only provided an overview of the taxation of patents. In any event, prudence would dictate discussing and planning any such sale with tax counsel.
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