How the Tax Cuts and Jobs Act Impacts Patent Transactions

  • Jan 22 2018
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  • Category: Blog

The Tax Cuts and Jobs Act recently signed into law could have a significant impact on transactions involving the transfer of patent rights.  Sales of the intellectual property rights associated with patents have long been treated like other property transactions in that profits were taxed at the long-term capital gains rate.  However, the tax reform measure eliminates capital gains treatment for profits from the sale of “self-created” patents, inventions or trade secrets.  Proceeds from the sale of these assets will now be treated as ordinary income.  

According to some observers, this new tax treatment may have a chilling effect on the commercialization of new technologies. Moreover, independent investors and startups seeking investment may be at a competitive disadvantage against large corporations.

Inventors and their investors have long relied on the beneficial tax treatment of patents as capital assets that, upon sale, result in long-term capital gains. This favorable tax treatment helped offset the risk of bringing new inventions to the market or licensing patents to others. Treating gains from patent sales as ordinary income may negatively affect the value of patents, with the higher tax rate driving down patent purchase prices.

The Takeaway

Although patent have long been treated as capital assets, it appears that lawmakers have abandoned this approach. How the Tax Cuts and Jobs Act will affect the patent landscape in the long run remains to be seen. In the meantime, having proper legal representation to protect your patent rights is more crucial now than ever. To learn more about how these changes will impact your business, please contact our experienced intellectual property attorneys