How much tax will I pay when I sell my business?

Reviewed by the RealDeal360 deal team · Updated November 2026 · 6-minute read

The short answer

Most of the gain on a business you've owned for over a year is taxed as a long-term capital gain: up to 20% federal,1 plus 4.95% Illinois income tax for Illinois residents.2 But parts of many deals are taxed as ordinary income at higher rates, so how the deal is structured can matter as much as the price. Plan it before you sign a letter of intent, not after.

The layers of tax on a sale

  • 0–20% — Federal long-term capital gains

    On the gain from goodwill and stock held over a year. Most sellers in this size range pay the top 20% rate on most of it.1

  • 3.8% — Net investment income tax

    May apply on top. Owners who actively work in the business are often exempt on that business's gain; passive owners usually aren't.3

  • 4.95% — Illinois income tax

    Illinois taxes capital gains at its flat individual rate. Other states differ; a few have none.2

  • up to 37% — Pieces taxed as ordinary income

    Depreciation recapture on equipment in an asset sale, consulting or employment payments after closing, and some non-compete payments are taxed at ordinary federal rates.1

Why structure matters as much as price

Stock sale

You sell your shares. Usually simpler for the seller and mostly capital gain. Buyers often prefer not to, because they inherit the company's history.

Asset sale

The company sells its assets. Buyers like the tax write-offs. How the price is split across equipment, goodwill and other items decides how much is taxed at ordinary rates. In a C corporation it can mean tax at the company and again for you.

Other levers worth asking about early: spreading payments over years (an installment sale), how earn-outs and seller notes are taxed, and whether your C-corporation stock qualifies for the federal small-business stock exclusion.

When to plan it

Before the letter of intent. Once you sign one, the structure and the price split are mostly set, and the levers above get harder to pull. Bring your own CPA in early; we work alongside them.

Sources

  1. IRS, Topic no. 409, Capital gains and losses; IRS Publication 544, Sales and other dispositions of assets.
  2. Illinois Department of Revenue, individual income tax rate.
  3. IRS, Questions and answers on the net investment income tax.

General information for 2026, not tax advice. Rates and rules change; your CPA or tax attorney should review your situation before you sign anything.