The tax treatment of trademarks in the United States runs on one main rule: trademarks are Section 197 intangibles, so the money you spend acquiring or creating one is capitalized and recovered through equal amortization deductions over 15 years. Ongoing maintenance is usually deductible in the year you pay it. Royalty income is ordinary. And when you sell, part of the gain is pulled back into ordinary income to recapture the amortization you already claimed.
Why Section 197 Controls Almost Everything
The IRS groups trademarks, trade names, and franchises with goodwill, going concern value, and covenants not to compete under Section 197.1Office of the Law Revision Counsel. 26 U.S. Code 197 – Amortization of Goodwill and Certain Other Intangibles That single classification drives the 15-year recovery period, the ordinary-income recapture rules on sale, and the loss disallowance rule on abandonment.
Two shortcuts that work for other business assets do not work here. Trademarks are not eligible for Section 179 immediate expensing, which is limited to tangible personal property and off-the-shelf software.2Internal Revenue Service. Instructions for Form 4562 (2025) And since the Tax Cuts and Jobs Act, Section 1031 like-kind exchanges are limited to real property, so you cannot defer gain by swapping one trademark for another.3Internal Revenue Service. Like-Kind Exchanges – Real Estate Tax Tips Fifteen-year amortization is essentially the only route for recovering your investment.
Capitalizing What You Spend to Get the Trademark
Whether you buy the mark or build it yourself, the initial outlay is a capital expenditure. It becomes the trademark’s tax basis, and you deduct that basis in equal monthly amounts over 15 years, beginning the month you acquire the asset.1Office of the Law Revision Counsel. 26 U.S. Code 197 – Amortization of Goodwill and Certain Other Intangibles
Buying a Trademark
When you purchase a trademark from a third party, the full acquisition cost is amortized over 15 years. That basis includes the purchase price plus legal fees, accounting fees, and other transaction costs tied to the deal. Annual amortization is reported on Form 4562.4Internal Revenue Service. About Form 4562, Depreciation and Amortization The 15-year clock runs regardless of the mark’s actual legal life or how long you expect to use it.
Creating a Trademark In-House
Most self-created intangibles sit outside Section 197. Trademarks are one of the explicit exceptions written into the statute. Design fees, trademark search costs, and the legal fees for registration all get capitalized and amortized over the same 15 years as a purchased mark.1Office of the Law Revision Counsel. 26 U.S. Code 197 – Amortization of Goodwill and Certain Other Intangibles
The Startup Election for New Businesses
If the trademark costs are part of launching a business, Section 195 lets you deduct up to $5,000 of total startup costs in the year the business begins active operations. That $5,000 allowance phases out dollar-for-dollar once total startup costs pass $50,000 and disappears entirely at $55,000. Whatever startup costs are left after the immediate deduction are amortized over 180 months.5Office of the Law Revision Counsel. 26 U.S. Code 195 – Start-Up Expenditures The allowance applies to your total startup spending, not to trademark costs alone, so a heavy pre-launch budget can eat through it before your trademark line item is counted.
Ongoing Costs You Can Deduct in the Current Year
Once the mark is registered, routine costs of keeping it alive are ordinary business expenses. The dividing line is maintenance versus expansion: preserving what you already have is deductible; acquiring new rights is capital.
Renewal and Monitoring Fees
The USPTO requires a declaration of continued use between the fifth and sixth year after registration, then combined renewal and declaration filings every ten years. Filing fees currently range from $325 per class for a basic declaration to $650 per class for the combined ten-year renewal.6United States Patent and Trademark Office. Trademark Fee Information Those fees, plus trademark watch services and similar administrative costs, are deductible when paid.
Legal Fees and the Origin-of-the-Claim Doctrine
Litigation costs follow the origin of the claim. If the suit protects rights you already have, such as an infringement action against a competitor using a confusingly similar mark, the legal fees are deductible as ordinary business expenses. If the litigation produces new rights or a broader scope of protection, such as resolving a disputed geographic territory in your favor, the fees are capitalized and added to the trademark’s amortizable basis. The IRS looks at what the case is fundamentally about, not what you hoped to achieve.
Licensing Income and Royalty Payments
Royalty payments the trademark owner collects are ordinary business income in the year received. The licensee generally deducts the same royalty payments as ordinary business expenses, unless Section 263A’s uniform capitalization rules require capitalization because the licensee uses the mark in producing inventory.
The licensor can also deduct the costs of running the licensing relationship, such as drafting the license agreement or monitoring the licensee’s compliance with quality standards.
Selling or Transferring the Trademark
The disposition rules are where trademarks get complicated. Three separate provisions can apply to the same transaction, and mis-structuring the deal can convert what looks like a capital gain into ordinary income.
Basis, Gain, and Section 1231
Start with adjusted basis: original capitalized cost minus every amortization deduction you’ve claimed. Sale price minus adjusted basis is your gain. If you’ve held the trademark more than a year, it is Section 1231 property, and the gain gets long-term capital gains treatment to the extent your Section 1231 gains exceed your Section 1231 losses for the year.7Office of the Law Revision Counsel. 26 U.S. Code 1231 – Property Used in the Trade or Business and Involuntary Conversions
Section 1245 Recapture
Section 197 intangibles are also Section 1245 property. Any gain on sale is recaptured as ordinary income up to the cumulative amortization you previously claimed, and only gain above that amount qualifies for capital gains rates.8Internal Revenue Service. Publication 544 (2025), Sales and Other Dispositions of Assets
An example makes the math concrete. You purchased a trademark for $150,000 and claimed $50,000 in amortization, leaving an adjusted basis of $100,000. You sell for $250,000, producing a $150,000 gain. The first $50,000 is recaptured as ordinary income; the remaining $100,000 is long-term capital gain.9Office of the Law Revision Counsel. 26 U.S. Code 1245 – Gain From Dispositions of Certain Depreciable Property
Section 1253: Contingent Payments and Retained Rights
Two provisions in Section 1253 can override capital gains treatment entirely.
First, if any portion of the sale price is contingent on the trademark’s future productivity, use, or disposition, those contingent payments are treated as ordinary income.10Office of the Law Revision Counsel. 26 U.S. Code 1253 – Transfers of Franchises, Trademarks, and Trade Names A deal structured as “10 percent of annual revenue from the brand for the next eight years” triggers this rule regardless of how the transfer is labeled. Earn-out structures are where trademark sales most often lose the capital gains rate their sellers were expecting.
Second, if the seller keeps any “significant power, right, or continuing interest” in the mark, the transfer is not treated as a sale of a capital asset. The statute reads that phrase broadly: the right to terminate the agreement at will, to approve or disapprove assignments, to set quality standards for products sold under the mark, or to require the buyer to purchase supplies from the seller all count.10Office of the Law Revision Counsel. 26 U.S. Code 1253 – Transfers of Franchises, Trademarks, and Trade Names Retain any of them and payments become ordinary income.
Selling the Trademark With a Business
When the trademark changes hands as part of an entire business, Section 1060 requires the purchase price to be allocated among the acquired assets using the residual method.11Office of the Law Revision Counsel. 26 U.S. Code 1060 – Special Allocation Rules for Certain Asset Acquisitions Trademarks fall in Class VI (Section 197 intangibles other than goodwill and going concern value); goodwill and going concern value sit in Class VII and absorb whatever purchase price is left after the other classes are filled.12Internal Revenue Service. Instructions for Form 8594 (11/2021)
Both buyer and seller must file Form 8594 with their returns for the year of the sale. A written allocation the parties agree to is binding on both of them for tax purposes. The buyer’s allocated cost becomes the amortizable basis for the trademark on their side; the seller’s allocation determines the gain or loss on that specific asset.
The 3.8 Percent Net Investment Income Tax
Gain on a trademark sale can also draw the 3.8 percent net investment income tax if modified adjusted gross income exceeds $200,000 for single filers or $250,000 for joint filers. Those thresholds are not indexed for inflation.13Internal Revenue Service. Questions and Answers on the Net Investment Income Tax Net operating income from a nonpassive business is excluded, so whether the tax applies depends on how actively involved you were in the business that used the mark.
Abandoning a Trademark and the Loss Disallowance Trap
When a brand is discontinued or a registration allowed to lapse, you might expect a loss deduction for the remaining adjusted basis. The rules are less generous than they look.
An abandonment loss generally requires ownership, intent to abandon, and an affirmative step giving the asset up. For intangibles, that typically means a documented act of abandonment rather than passive lapse. The loss equals the trademark’s adjusted basis at the time.
The catch sits in Section 197(f)(1). If you abandon or write off one Section 197 intangible but keep other Section 197 intangibles acquired in the same transaction, you cannot recognize the loss. The remaining basis of the worthless trademark is added to the basis of the retained intangibles and recovered through their continued amortization.1Office of the Law Revision Counsel. 26 U.S. Code 197 – Amortization of Goodwill and Certain Other Intangibles The loss is deferred, not permanently denied, but timing matters. If the trademark came in as part of a business purchase that also included goodwill, a customer list, or a covenant not to compete, writing off the mark alone does nothing for the current year’s tax bill while those other intangibles are still on the books.