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I'm an independent developer who has been working for the past year or so on product X. I don't have a company created that is associated with the product, as we have yet to officially launch (no revenue yet). I'm in talks with company Y who would like to acquire product X (the product and all IP associated with it; not acquiring a company, as there is no company, just the product) for cash-only and hire me as an employee. Will the acquisition itself be taxable as a capital gain or as regular income? (if it's the latter, will I pay self-employment tax on the acquisition amount?)

I'm in Washington (the state), we don't have a state income tax, hence any amounts would be federal.

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3 Answers

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For an asset to be taxable as capital gain, you need to hold on to it for more than a year. Since you created the software during the last year, you haven't had it for more than year, therefor it should be taxed as regular income.

That's my opinion, and it's worth every penny you paid for it :-). In other words, you should really talk to a CPA.

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I'm not an accountant or a tax attorney, but my understanding is that this will be taxed as regular income.

If you make more than $400 from the sale of your product, you will have to pay self-employment tax. The IRS says:

You must pay SE tax if you had net earnings of $400 or more as a self-employed person. If you are in business (farm or non-farm) for yourself, you are self-employed.

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There may be ways of structuring the sale (payable over time, perhaps) to get at least some capital gains treatment.

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