Hi, I’m Chris Walton, author of this guide and CEO of Eton Venture Services.
I’ve spent much of my career working as a corporate transactional lawyer at Gunderson Dettmer, becoming an expert in tax law & venture financing. Since starting Eton, I’ve completed thousands of business valuations for companies of all sizes.
Read my full bio here.
You’ve spent years building a company, taking risks, reinvesting profits, and carrying the weight of every decision. Now that a sale is within reach, seeing the projected capital gains tax can feel like an unexpected hit to what you worked so hard to create.
A business sale is often the largest financial event of an entrepreneur’s life, and how it’s structured can significantly affect what you ultimately keep.
We’ve helped many founders navigate this exact stage and improve their outcomes with the right planning. In this article, we’ll walk through the practical steps to reduce the impact.
In many cases you can significantly reduce, defer, or strategically manage capital gains tax on a business sale with proper planning.
Completely eliminating it is uncommon. If you sell at a gain, some level of tax is usually part of the transaction. But the actual outcome depends heavily on deal structure, timing, eligibility for exemptions such as QSBS, state residency, and whether planning occurs before major milestones like signing an LOI.
There is no universal loophole. There are proven, lawful strategies. The difference is preparation and execution.
While the tax on the sale of a business can feel like a significant obstacle, there are several strategies you can use to defer, reduce, or even eliminate the tax burden.
Here are 11 proven ways to do this and protect more of your hard-earned profits:
Avoiding capital gains tax on the sale of your business can start with something as simple as smart timing.
Assets held for over one year are taxed at the more favorable long-term capital gains rates. On the other hand, those sold within a year are taxed as short-term gains at higher ordinary income tax rates.
Determine when you acquired the asset and calculate how much longer you need to hold it to reach the one-year mark to avoid incurring higher tax liabilities.
This strategy, also known as tax-loss harvesting, involves selling investments that have lost value to offset your taxable gains.
For example, if you earned a $7,000 gain on one stock but sold another at a $3,000 loss, you would only be taxed on $4,000 of gains.
Any unused losses can be carried forward to offset gains in future years, making this an effective way to manage your tax bill while optimizing your investment portfolio.
Careful planning and selling underperforming assets in the same year you make significant gains can maximize the tax-saving potential of this strategy.
An installment sale allows you to spread your capital gains tax liability over several years.
To structure your sale in this way, arrange for the buyer to pay for your business in installments over time rather than a lump sum.
This approach doesn’t eliminate capital gains tax but distributes the tax burden over time, potentially lowering your annual tax liability. It’s one of the straightforward tax strategies for selling a business, especially when liquidity or buyer financing is a concern.
One common type of installment sale is seller financing, where the seller acts as a lender and allows the buyer to pay over time, often with interest.
Seller financing provides tax benefits and makes it easier for buyers, such as employees or family members, to afford the purchase without requiring upfront capital.
Qualified Small Business Stock (QSBS) is a type of stock issued by eligible small businesses that offers significant tax benefits to investors.
To take advantage of Qualified Small Business Stock (QSBS) benefits, purchase QSBS directly from a qualified small business and hold it for at least five years.
By meeting this holding period requirement, you may be able to exclude up to 100% of the capital gains from federal taxes when you sell the stock.
This program is designed to encourage investments in innovative small businesses. In turn, it offers investors the opportunity to reduce their tax liability while supporting growing companies.
To qualify, the business must be a domestic C-corporation with gross assets of $50 million or less when the stock is issued. Additionally, at least 80% of its assets must be actively used in its operations.
At Eton, our team can provide expert guidance and valuation services to maximize your QSBS tax benefits.
A 1031 exchange, named after Section 1031 of the IRS, lets you defer capital gains tax on a business sale by reinvesting the proceeds into a like-kind asset.
To take advantage of this strategy:
1031 exchanges now apply only to real property held for business or investment purposes.
When you “postpone” taxes through a 1031 exchange, you can preserve cash flow and reinvest the full value of your sale into your next venture, giving you more flexibility to grow your investments.
The capital gains tax is deferred until you sell the replacement asset unless you complete another 1031 exchange at that time.
Opportunity Zones, designated under the Tax Cuts and Jobs Act, are economically distressed areas identified based on specific criteria to qualify for investment incentives. You can defer and potentially reduce your capital gains tax by reinvesting your capital gains into these zones.
Here’s what you need to do:
This strategy provides significant tax advantages and contributes to revitalizing underserved communities, making it a win-win for your finances and social impact.
Selling a business to employees through an Employee Stock Ownership Plan (ESOP) can defer capital gains tax for business owners.
Here’s how it works:
If your business is a C-Corporation with non-publicly traded stock and the ESOP acquires at least 30% of the company, you can roll the proceeds into Qualified Replacement Property (stocks and bonds of U.S. operating companies) within 12 months, allowing you to defer capital gains tax and gain financial flexibility.
This is a practical solution for business owners seeking a smooth transition that benefits both their finances and their team.
A Charitable Remainder Trust (CRT) is an irrevocable, tax-exempt trust that allows you to sell your business in a tax-efficient way while supporting a charity. Here’s how it works:
While you could sell your business and reinvest the proceeds yourself, you’d likely pay more taxes and receive less income.
That’s why it’s a great option to preserve more of your hard-earned money, secure a steady income stream, and leave a lasting gift to a cause you care about.
Rollover equity allows you to defer paying capital gains tax. To achieve this:
This means you only pay taxes on the cash portion of the sale now, while the taxes on the equity portion are deferred until the buyer eventually sells the new company.
This strategy postpones your tax liability and gives you a chance to benefit from the future growth of the new business.
A non-grantor trust is a type of trust where the trust itself, not the person who created it, is responsible for paying taxes. Any income or capital gains from the trust’s assets get taxed to the trust or its beneficiaries, not the creator. To apply this strategy:
This strategy is particularly effective for families looking to manage the tax burden on large capital gains while passing wealth to the next generation.
The IRS allows you to give each recipient a specific amount of assets or property every year without triggering a gift tax.
For 2026, the annual gift tax exclusion remains $19,000 per recipient. This means you can give up to $19,000 worth of shares or other assets to each individual during the year without triggering gift tax or reducing your lifetime exemption.
If you give more than $19,000 to any one person in 2026, the excess amount must be reported on Form 709 and will reduce your lifetime estate and gift tax exemption, which increases to $15,000,000 per individual for 2026.
Most people will not owe out-of-pocket gift tax unless they exceed this $15 million lifetime limit.
Married couples can elect gift splitting, allowing them to give up to $38,000 per recipient in 2026 without reducing either spouse’s lifetime exemption.
For example:
If you gift shares worth $30,000 to one person in 2026, $19,000 will fall under the annual exclusion, and the remaining $11,000 will reduce your lifetime exemption.
No immediate tax is owed, and you can continue gifting shares tax-efficiently while also lowering your taxable estate.
This strategy helps minimize capital gains tax while enabling you to pass wealth to your family in a structured and tax-friendly way.
With extensive experience in diverse scenarios, our team at Eton provides estate and gift tax valuations that follow IRS rules and support your family’s generational wealth strategies.
At Eton, our tailored valuation and transaction advisory services are designed to help business owners exit while maximizing value creation.
We understand how important it is to keep more of your hard-earned money, we’re here to provide the expertise and support you need to navigate complex tax challenges.
No, only capital assets are subject to capital gains tax. These typically include property held for investment or long-term business use, such as real estate, equipment, or goodwill.
Assets held primarily for sale to customers in the ordinary course of business, such as inventory or accounts receivable, are treated as ordinary income assets instead. When sold, they’re taxed at ordinary income tax rates, not capital gains rates.
Yes, you can combine multiple strategies to reduce or defer capital gains tax on a business sale.
For example, you might use tax-loss harvesting to offset gains while structuring part of the sale as an installment sale to spread out the tax burden.
Other strategies, like combining a 1031 exchange with gifting shares under the annual gift tax exclusion, can also work together.
At Eton Venture Services, we help clients find the right mix of strategies for their situation, so the sale is structured efficiently and the tax outcome works in their favor. Contact us here.
You typically pay capital gains tax when you file your annual income tax return for the year the sale occurred. For most taxpayers, this means the tax is due by the following year’s tax deadline, usually April 15.
However, if the sale results in a significant gain, you may need to make estimated tax payments throughout the year to avoid underpayment penalties. It’s advisable to consult a tax advisor to ensure you meet any payment requirements and deadlines.
Strategies like a 1031 exchange or rollover equity allow you to defer capital gains tax as long as the replacement asset is held. However, taxes are eventually due when the asset is sold unless further deferral strategies are used.
Schedule a free consultation meeting to discuss your valuation needs.
Chris Walton, JD, is President and CEO and co-founded Eton Venture Services in 2010 to provide mission-critical valuations to private companies. He leads a team that collaborates closely with each client’s leadership, board of directors, internal / external counsel, and independent auditors to develop detailed financial models and create accurate, audit-ready valuations.
