Dispositions of Intangible Property: Business Property Sales (2025 IRS Guide)

This guide covers “Dispositions of Intangible Property” within business property sales. The following material presents the IRS treatment of this topic, including the qualifications, exceptions, and examples in the source section. Read the rules alongside the facts of your own situation before deciding what to report, deduct, or document.

Adapted from Publication 544 (2025), Sales and Other Dispositions of Assets, published by the Internal Revenue Service. This guide retains the source edition’s years, amounts, deadlines, and examples. It is guidance for that edition, not a statement that the same figures apply to every tax year.

Dispositions of Intangible Property

Intangible property is any personal property that has value but cannot be seen or touched. It includes such items as patents, copyrights, and the goodwill value of a business.

Gain or loss on the sale or exchange of amortizable or depreciable intangible property held longer than 1 year (other than an amount recaptured as ordinary income) is a section 1231 gain or loss. The treatment of section 1231 gain or loss and the recapture of amortization and depreciation as ordinary income are explained in chapter 3. See chapter 1 of Pub. 946, How To Depreciate Property, for information on intangible property that can and cannot be depreciated. Gain or loss on dispositions of other intangible property is ordinary or capital depending on whether the property is a capital asset or a noncapital asset.

The following discussions explain special rules that apply to certain dispositions of intangible property.

Section 197 Intangibles

Section 197 intangibles are certain intangible assets acquired after August 10, 1993 (after July 25, 1991, if chosen), and held in connection with the conduct of a trade or business or an activity entered into for profit whose costs are amortized over 15 years. They include the following assets.

• Goodwill.

• Going concern value.

• Workforce in place.

• Business books and records, operating systems, and other information bases.

• Patents, copyrights, formulas, processes, designs, patterns, know-how, formats, and similar items.

• Customer-based intangibles.

• Supplier-based intangibles.

• Licenses, permits, and other rights granted by a governmental unit.

• Covenants not to compete entered into in connection with the acquisition of a business.

• Franchises, trademarks, and trade names.

Dispositions.

You cannot deduct a loss from the disposition or worthlessness of a section 197 intangible you acquired in the same transaction (or series of related transactions) as another section 197 intangible you still hold. Instead, you must increase the adjusted basis of your retained section 197 intangible by the nondeductible loss. If you retain more than one section 197 intangible, increase each intangible’s adjusted basis. Figure the increase by multiplying the nondeductible loss by a fraction, the numerator (top number) of which is the retained intangible’s adjusted basis on the date of the loss and the denominator (bottom number) of which is the total adjusted basis of all retained intangibles on the date of the loss.

In applying this rule, members of the same controlled group of corporations and commonly controlled businesses are treated as a single entity. For example, a corporation cannot deduct a loss on the sale of a section 197 intangible if, after the sale, a member of the same controlled group retains other section 197 intangibles acquired in the same transaction as the intangible sold.

Covenant not to compete.

A covenant not to compete (or similar arrangement) that is a section 197 intangible cannot be treated as disposed of or worthless before you have disposed of your entire interest in the trade or business for which the covenant was entered into. Members of the same controlled group of corporations and commonly controlled businesses are treated as a single entity in determining whether a member has disposed of its entire interest in a trade or business.

Anti-churning rules.

Anti-churning rules prevent a taxpayer from converting section 197 intangibles that do not qualify for amortization into property that would qualify for amortization. However, these rules do not apply to the part of the basis of property acquired by certain related persons if the transferor elects to do both of the following.

• Recognize gain on the transfer of the property.

• Pay income tax on the gain at the highest tax rate.

If the transferor is a partnership or S corporation, the partnership or S corporation (not the partners or shareholders) can make the election. But each partner or shareholder must pay the tax on his or her share of gain.

To make the election, you, as the transferor, must attach a statement containing certain information to your income tax return for the year of the transfer. You must file the tax return by the due date (including extensions). You must also notify the transferee of the election in writing by the due date of the return.

If you timely filed your return without making the election, you can make the election by filing an amended return within 6 months after the due date of the return (excluding extensions). Attach the statement to the amended return and enter “Filed pursuant to section 301.9100-2” at the top of the statement. File the amended return at the same address the original return was filed.

For more information about making the election, see Regulations section 1.197-2(h)(9).

Patents

The transfer of a patent by an individual is treated as a sale or exchange of a capital asset held longer than 1 year. This applies even if the payments for the patent are made periodically during the transferee’s use or are contingent on the productivity, use, or disposition of the patent. For information on the treatment of gain or loss on the transfer of capital assets, see chapter 4.

This treatment applies to your transfer of a patent if you meet all the following conditions.

• You are the holder of the patent.

• You transfer the patent other than by gift, inheritance, or devise.

• You transfer all substantial rights to the patent or an undivided interest in all such rights.

• You do not transfer the patent to a related person.

Note:

For dispositions after December 31, 2017, certain patents are not treated as capital assets. See Noncapital Assets, earlier. Also, see Patents and copyrights in chapter 3.

Holder.

You are the holder of a patent if you are either of the following.

• The individual whose effort created the patent property and who qualifies as the original and first inventor.

• The individual who bought an interest in the patent from the inventor before the invention was tested and operated successfully under operating conditions and who is neither related to nor the employer of the inventor.

All substantial rights.

All substantial rights to patent property are all rights that have value when they are transferred. A security interest (such as a lien) 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.

All substantial rights to a patent are not transferred if any of the following apply to the transfer.

• The rights are limited geographically within a country.

• The rights are limited to a period less than the remaining life of the patent.

• The rights are limited to fields of use within trades or industries and are less than all the rights that exist and have value at the time of the transfer.

• The rights are less than all the claims or inventions covered by the patent that exist and have value at the time of the transfer.

Related persons.

This tax treatment does not apply if the transfer is directly or indirectly between you and a related person as defined earlier in the list under Nondeductible Loss, with the following changes.

1. Members of your family include your spouse, ancestors, and lineal descendants but not your siblings or half siblings.

2. Substitute “25% or more” ownership for “more than 50%.”

If you fit within the definition of a related person independent of family status, the sibling exception in (1), earlier, does not apply. For example, a transfer between siblings as beneficiary and fiduciary of the same trust is a transfer between related persons. The sibling exception does not apply because the trust relationship is independent of family status.

Franchise, Trademark, or Trade Name

If you transfer or renew a franchise, trademark, or trade name for a price contingent on its productivity, use, or disposition, the amount you receive is generally treated as an amount realized from the sale of a noncapital asset. A franchise includes an agreement that gives one of the parties the right to distribute, sell, or provide goods, services, or facilities within a specified area.

Significant power, right, or continuing interest.

If you keep any significant power, right, or continuing interest in the subject matter of a franchise, trademark, or trade name that you transfer or renew, the amount you receive is ordinary royalty income rather than an amount realized from a sale or exchange.

A significant power, right, or continuing interest in a franchise, trademark, or trade name includes, but is not limited to, the following rights in the transferred interest.

• A right to disapprove any assignment of the interest or any part of it.

• A right to end the agreement at will.

• A right to set standards of quality for products used or sold or for services provided and for the equipment and facilities used to promote such products or services.

• A right to make the recipient sell or advertise only your products or services.

• A right to make the recipient buy most supplies and equipment from you.

• A right to receive payments based on the productivity, use, or disposition of the transferred item of interest if those payments are a substantial part of the transfer agreement.

Using the guidance

Keep the documents that establish the dates, amounts, and circumstances described above. References to other chapters, forms, worksheets, or earlier and later sections refer to the linked IRS publication. Check the full publication and its updates before relying on a rule for a different tax year or a situation not addressed here.

Sources and further reading

• Publication 544 (2025), Sales and Other Dispositions of Assets: Ordinary or Capital Gain or Loss — Other Dispositions — Dispositions of Intangible Property — Internal Revenue Service; 2025 edition.

The cited U.S. government text is in the public domain. Source accessed October 28, 2026. Fynoptic has organized this material for educational use and is independent of, and not endorsed by, the IRS.