Capital Gains Tax on Selling a Business: 2026 Rates, Real Math, and What You Can Do About It

Most business owners hear "capital gains" and think there's one rate. There isn't. A business sale triggers up to four separate taxes — federal long-term capital gains, the Net Investment Income Tax, depreciation recapture at ordinary income rates, and state tax — and the interaction between them depends heavily on how the deal is structured. Here's the full picture for 2026, with worked numbers.

The short answer most sellers don't expect: On a $10M business sale with modest basis and depreciation history, the combined federal tax bill (before state) typically runs 23.8%–32% of the gain, depending on deal structure. In California, add 13.3%. In Texas, add zero. Structure — stock vs. asset sale, QSBS qualification, installment timing — is where the real variation lives, and where pre-sale planning pays off most.

The four taxes on a business sale

1. Federal long-term capital gains tax

If you've owned your business interest for more than one year, the gain qualifies as long-term capital gain and is taxed at preferential rates. For 2026, the federal long-term capital gains brackets are:¹

Rate	Single filers — taxable income up to	Married filing jointly — taxable income up to
0%	$49,450	$98,900
15%	$49,451 – $545,500	$98,901 – $613,700
20%	Above $545,500	Above $613,700

In practice, most business sellers land in the 20% bracket. A $5M sale — even with substantial basis — typically produces enough gain to push taxable income well above the $545,500 threshold. The 0% rate is a planning tool for post-sale Roth conversions and portfolio repositioning, not the rate on the sale itself.

2. Net Investment Income Tax (NIIT) — 3.8%

Since 2013, a 3.8% surtax applies to net investment income when Modified Adjusted Gross Income exceeds $200,000 (single) or $250,000 (married filing jointly).² These thresholds have never been adjusted for inflation — they're the same as when the tax was enacted — which means nearly every business sale of any size triggers it.

Capital gains from a business sale qualify as net investment income unless the owner materially participated in the business as defined by IRS passive activity rules (§ 469). Most operating-company owners who work in their business materially participate, which means their gain is typically not subject to NIIT. However, the rules are specific, and if your ownership is passive (a minority stake, an investment holding, a rental business), NIIT applies on top of the LTCG rate.

Combined federal rate when NIIT applies: 20% + 3.8% = 23.8%. This is the baseline most planners use for business sale gain estimates when the seller is an active participant in a C-corp or pass-through entity.

3. Depreciation recapture — the tax that surprises sellers

When you've deducted depreciation on business assets over the years, selling those assets forces you to "recapture" those deductions as taxable income. The recapture rate depends on what type of asset is involved:

§ 1245 property (equipment, machinery, vehicles, leasehold improvements): All prior depreciation is recaptured as ordinary income — taxed at your ordinary income rate, up to 37%.³ This is the most expensive recapture category. A seller with $1M of equipment fully depreciated via bonus depreciation (100% was restored permanently by the OBBBA for property placed in service after January 19, 2025) faces $1M of ordinary income at the top rate — $370,000 of federal tax on that slice alone.
§ 1250 property (commercial real estate, buildings): Only "additional depreciation" (amounts above straight-line) is recaptured as ordinary income. The remaining prior straight-line depreciation is taxed as "unrecaptured § 1250 gain" at a maximum federal rate of 25% — more expensive than standard LTCG but less than the top ordinary income rate.³
In a stock sale: Depreciation recapture doesn't apply to the seller. The buyer inherits the existing depreciation schedule with carryover basis. This is a central reason sellers prefer stock sales, and why buyers paying a premium demand asset sale treatment or a § 338(h)(10) election.

Recapture in an asset sale — quick math. A $10M asset sale with $2M allocated to equipment (fully depreciated via bonus depreciation) produces $2M of ordinary income at 37% = $740K of federal tax on just that slice. The same $2M in a stock sale produces $2M of long-term capital gain at 20% = $400K. That single line-item difference is $340K — purely a function of deal structure.

4. State capital gains tax

Most states tax capital gains as ordinary income. The spread is enormous:

California: 13.3% state income tax on all capital gains — no preferential rate for long-term gains. A California seller in the 20%+3.8% federal bracket faces a combined marginal rate near 37% on clean LTCG and above 50% on ordinary income recapture.
New York: Up to 10.9% state, plus NYC residents pay an additional 3.876% local tax, pushing combined state+local near 14.8%.
Texas, Florida, Nevada, Wyoming: No state income tax. Zero state capital gains. All else equal, the after-tax difference between closing a deal as a California resident vs. a Texas resident can be $1M+ on a $10M transaction.
Washington: 7% long-term capital gains tax on gains above $270,000 (passed constitutional review in 2023). Not a zero-tax state for large exits.

Domicile planning — establishing residency in a low-tax state before a sale — can be legitimate but requires genuine relocation well in advance of the transaction. States audit this aggressively. California's FTB in particular has a long memory and broad sourcing rules for business income earned before departure.

Putting it together: what a $10M sale actually costs

Here's a concrete example — a California founder selling a manufacturing business structured as an S-corporation:

	Asset sale	Stock sale
Sale price	$10,000,000	$10,000,000
Adjusted basis in business	$500,000	$500,000
§ 1245 recapture (equipment, ordinary income @ 37%)	$555,000	—
Long-term capital gain (LTCG @ 20%)	$1,788,000	$1,890,000
NIIT (3.8%; assumed material participation = 0)	—	—
California state tax (13.3%)	$1,262,150	$1,260,000
Estimated total tax	$3,605,150	$3,150,000
After-tax proceeds	$6,394,850	$6,850,000

Note: Simplified for illustration. Assumes $1.5M of fully-depreciated § 1245 equipment allocated in the asset sale. Individual results depend on basis, asset allocation, holding period, and full income picture. Work with a tax advisor before the LOI stage.

The structure gap — $455,150 on a $10M deal — is purely a function of whether equipment recapture applies, not a difference in the underlying business value. This is why structure negotiation matters and why most sellers leave money on the table by not modeling it before signing an LOI.

What makes this dramatically better (or worse)

QSBS qualification: the biggest single lever

If your business is a C-corporation and you meet the qualified small business stock requirements under IRC § 1202, you can exclude up to $15M of gain per taxpayer from federal capital gains tax entirely — at a rate of 0%.⁴ Under the OBBBA (July 2025), the post-OBBBA exclusion cap is the greater of $15M or 10× your adjusted basis, with tiered exclusions at 50% (3 years), 75% (4 years), and 100% (5 years). This is the most powerful exit tax benefit in the code. A founder who planned 5+ years ahead can legally eliminate most or all of the federal capital gains tax on a sub-$15M transaction.

QSBS requires a stock sale — asset sales don't qualify. Which is another reason sellers who qualify should hold out for stock sale structure.

Full guide: QSBS Section 1202 deep dive | Calculator: QSBS exclusion calculator

Installment sale: spread the gain across years

Under IRC § 453, if you receive sale proceeds over multiple years (seller note or structured payments), you recognize gain proportionally as payments arrive. This can keep you out of the top 20% bracket in early years — or at least smooth the income spike that would otherwise land in one year. Key caveat: § 453(i) requires you to recognize all depreciation recapture in the year of sale regardless of when you actually receive that money. And large notes above $5M outstanding trigger the § 453A interest charge (a phantom interest rate on deferred tax). Model this carefully before agreeing to a seller note.

Full guide: Installment sale strategy | Calculator: Installment sale calculator

Charitable Remainder Trust before the sale

Contributing appreciated business stock to a Charitable Remainder Trust before the sale (before a binding commitment to sell) lets the trust sell tax-exempt, preserve the full pre-tax proceeds, and pay you an income stream over your lifetime. You take a charitable deduction for the remainder interest. A CRT can be particularly powerful when you have both a large gain and charitable intent — but the binding-commitment rule (Rev. Rul. 78-197) requires the trust to be funded before negotiations are too far advanced. This is a "start early" strategy.

Full guide: Charitable Remainder Trust before a business sale

Pre-sale estate planning: transfer value before it's taxed

GRATs, IDGTs, and direct gifting allow you to transfer business interests to family members or trusts before the sale, at a discounted valuation, using your $15M lifetime estate and gift exemption (OBBBA, permanent as of 2026).⁵ Done correctly, the appreciation that occurs between the gift date and closing passes to heirs transfer-tax-free. These windows close permanently once a transaction is announced — buyers aren't going to allow valuation discounts after an arm's-length price has been established.

Full guide: Estate planning before a business sale

Deal structure negotiation

The difference between an asset sale and a stock sale is the largest variable under your direct control during negotiations. Understand the exact dollar gap — model it with your advisor — before agreeing to any structure. If the buyer needs a step-up, quantify what you'd accept as a premium for providing it. If you're an S-corp, understand the § 338(h)(10) election and whether it narrows the gap enough to matter.

Full guide: Asset sale vs. stock sale | Calculator: Side-by-side calculator

When to get help — and why "after the LOI" is too late

The strategies that produce the largest tax savings — QSBS qualification, GRAT/IDGT execution, CRT funding, entity conversion — require lead times measured in years, not weeks. QSBS clocks start at original stock issuance. GRAT funding requires a realistic hurdle period. CRT requires transfer before the "binding commitment" to sell. Once you've signed an LOI and exclusivity has begun, most of these windows are closed.

The optimal time to engage an exit-planning financial advisor is 2–5 years before your expected sale date. The second-best time is now. An advisor can run the full tax model across structures, identify which strategies apply to your situation, and coordinate with your M&A attorney and CPA so each professional is working toward the same outcome — not just their piece of it.

Model the full picture before you negotiate. The tax math on your specific situation — your entity type, basis, asset composition, state of residency, QSBS status, charitable intent — determines which strategies apply and what they're worth. A fee-only advisor who specializes in business exits can run that model, which is exactly what we match you with.

How we can help

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Sources

IRS Rev. Proc. 2025-32 (2026 inflation adjustments); Tax Foundation, 2026 Tax Brackets and Federal Income Tax Rates. Long-term capital gains brackets: 0% ≤$49,450/$98,900 (single/MFJ); 15% to $545,500/$613,700; 20% above. // IRS Rev. Proc. 2025-32, §3.03.
IRS Topic No. 559 — Net Investment Income Tax. Rate 3.8%; individual MAGI thresholds $200,000 (single) / $250,000 (MFJ); not inflation-adjusted. IRC § 1411.
IRS Publication 544, Sales and Other Dispositions of Assets. § 1245 recapture at ordinary income rates (IRC § 1245); unrecaptured § 1250 gain at maximum 25% rate (IRC § 1(h)(1)(D)).
IRC § 1202 (as amended by the One Big Beautiful Bill Act, enacted July 2025). QSBS exclusion: 50% at 3 years, 75% at 4 years, 100% at 5 years for post-OBBBA stock; exclusion cap the greater of $15M or 10× adjusted basis per taxpayer. IRS Form 8949 instructions (§ 1202 reporting).
IRC § 2010(c) as modified by the One Big Beautiful Bill Act (July 2025); basic exclusion amount $15,000,000 per individual, indexed for inflation. GRAT mechanics under IRC § 2702; § 7520 rate May 2026: 5.0%. IRS Estate and Gift Taxes.

Tax values verified against 2026 IRS guidance (Rev. Proc. 2025-32) and OBBBA amendments (July 2025). State tax rates current as of May 2026. Consult a qualified tax advisor for your specific situation.