Tax Bill Proposes Repeal of Capital Gains Treatment for Patents

Speaker Paul Ryan

Speaker Paul Ryan

The Republican tax reform bill submitted in the House of Representatives earlier this week has buried in it patent provisions that would devalue certain patent transactions in terms of tax advantage.

Under current law, an individual who creates a patent and an unrelated individual who acquires a patent from its creator prior to the actual commercial use of the patent may treat any gains on the transfer of the patent as a long-term capital gain. To qualify, the transfer must be of substantially all the rights to the patent, or an undivided interest therein, and cannot be by gift, inheritance or devise.

Under the proposed provisions – Sections 3311 and 3312 of the bill and found at pages 248-249 – the rule treating the transfer of a patent prior to its commercial exploitation as being available for long-term capital gains treatment would be repealed. The provision, if enacted, would become effective for dispositions after 2017.

This proposed change is accomplished through a series of amendments to the tax code. In addition to several conforming amendments, and striking 26 U.S.C. 1235, the following amendments would be made (with additions bold and underlined and language removed struck through).

26 U.S.C.1221(a) In general. For purposes of this subtitle, the term “capital asset” means property held by the taxpayer (whether or not connected with his trade or business), but does not include… (3) a patent, invention, model or design (whether or not patented), a secret formula or process, a copyright, a literary, musical, or artistic composition, a letter or memorandum, or similar property…

26 U.S.C.1231(b)(1) General rule. The term “property used in the trade or business” means property used in the trade or business, of a character which is subject to the allowance for depreciation provided in section 167, held for more than 1 year, and real property used in the trade or business, held for more than 1 year, which is not… (C) a patent, invention, model or design (whether or not patented), a secret formula or process, a copyright, a literary, musical, or artistic composition, a letter or memorandum, or similar property…

26 U.S.C. 901(l) Minimum holding period for withholding taxes on gain and income other than dividends etc. (5) Determination of holding period. Holding periods shall be determined for purposes of this subsection without regard to section 1235 or any similar rule without regard to any provision which treats a disposition as a sale or exchange of a capital asset held for more than 1 year or any similar provision.

Obviously, it is disheartening to see Republican leadership move to treat patents in this way, which suggests they do not view patents as a private property right. Not viewing patents as a private property right has become a growing and disturbing trend. It will be interesting to see whether Conservative groups, who have been very outspoken on patents being a private property right, will push back on this latest push to chip away at a property right of Constitutional magnitude.


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Join the Discussion

7 comments so far.

  • [Avatar for Mark Syman]
    Mark Syman
    January 7, 2018 04:48 pm

    An update to this article on how the final bill treats capital gains of patents – would be appreciated.

  • [Avatar for Carrie Hafeman]
    Carrie Hafeman
    December 21, 2017 06:40 pm

    Hi Gene:

    A lawyer just emailed me earlier today that the provision eliminating capital gain treatment for the sale of patents did not make it through the Conference Committee markup so gains from the sale of patents will continue to qualify for capital gain treatment.

    Is that true? Can you please check and update your readers. Thanks!

  • [Avatar for Valuationguy]
    November 6, 2017 05:04 pm

    Lost in Norway….while a majority of Repubs MIGHT support patent protection…the big problem is that the Chairmen of the key Committees in the House (and Senate) are controlled by opponents of patent reform (at least reform in the sense of making things BETTER for patent holders) because THEY (Goodlatte and Issa specifically) are fully captured by the tech giants of Silicon Valley and its money. Both know that once they exit Congress….they will be appointed to the Boards of Directors of some of these companies…and be set even better than their undeserved House pensions.

    (Issa…as the richest Congressman in office…doesn’t really need the money…but he has ALOT of connections in the Valley from prior to the sale of his company…and the social status of Corporate Directors is a nice feather for ego-drive people….which accurately describes most politicians.)

  • [Avatar for Lost In Norway]
    Lost In Norway
    November 6, 2017 03:18 am

    This is disheartening. I had really expected Republicans to jump on patent protection and ride that pony to the betterment of the country. Unfortunately, feeding from big money troughs crosses party lines. *sigh*

  • [Avatar for Roger Heath]
    Roger Heath
    November 5, 2017 01:07 am

    While the bent-left and the swerved-right can gloat over the demise of “unapproved IP” those like myself (micro-entity) suffer the consequences.

    In the first place, an IP patent has never been less viable.

    In the second place, while the price of 3D printers is within reach the cheap clones quality and support is wildly unreliable. A virtual financial pipeline to China.

    With so many barriers I may do a public disclosure in lieu of patents that could have assured a 20+- year stream of revenue for America, good wages with U.S. factories, reliable quality and support – only viable with IP control and accountability.

    The wealthy and mega-corporations will care little, nor will the bent-left elite.

    They will obtain and control the best of all things and bemoan “our” suffering with crocodile tears. The sober and soulful “have left the building”.

  • [Avatar for Valuationguy]
    November 3, 2017 03:16 pm

    Given the overwhelming issue of the lack of enforcement ALLOWED by the gov’t and courts…thus majorly devaluing patents….I don’t see this specific tax treatment provision as being much of a concern except in specific instances.

    Everyone will be asked to pony-up to feed the social welfare machine in some way or another….notwithstanding Trump’s attempts to lower (corporate) tax rates to rev up job creation.

  • [Avatar for Night Writer]
    Night Writer
    November 3, 2017 03:03 pm