Owners of patents, inventions, models, and similar property should be aware of a change in how property is characterized.

These types of intellectual property are now excluded from the definition of “capital asset” if they are owned by:

-the person who created them, or

-a person whose basis in the property is carried over from the creator’s basis—for instance, a person who received the property as a gift or inheritance from the creator.

For these owners, any gain or loss on the disposition of the property is ordinary, rather than capital. This can be beneficial if the disposition results in a loss. However, the tax rate on any gain will probably be higher than if the property were a capital asset.

For other owners, the old rules still apply—that is, the intellectual property is probably a capital asset unless it falls into another category of excluded property.  For instance, if the owner bought the property in a bona fide sale, gain on a subsequent disposition will probably be taxed at the lower rates for capital gain. However, the deduction for any loss may be limited.

Contact Us

Please call our office to discuss how these changes may affect you. We should consider what impact these rules have on any decision to keep your intellectual property or dispose of it. If you do decide to dispose of the property, we can also determine how to achieve the best tax outcome.