When preparing to sell your digital product business, it’s easy to focus primarily on valuation and finding the right buyer. But what really matters at the end of the day is how much you keep after taxes.

Understanding taxes on selling a digital product business is essential for planning your exit thoughtfully, reducing surprises, and maximizing your net proceeds.

At Merge, we help founders prepare early — ensuring that tax considerations are part of the strategy from the beginning, not an afterthought.

Why Tax Planning Matters

Without tax planning, a significant portion of your sale proceeds could go toward taxes, reducing what you take home.

Good planning ensures that:

  • You understand what portion of the sale is taxed at favorable capital gains rates

  • You account for any ordinary income treatment

  • You prepare for potential state and local tax implications

  • You know how payment timing affects your tax bill

Starting this planning before negotiating a sale ensures that you can structure the deal in a way that works best for you.

Asset Sale vs. Stock Sale: Different Tax Impacts

The structure of your deal will directly affect your tax outcome.

Asset Sale

In an asset sale, the buyer purchases the individual assets of your business — like intellectual property, customer lists, and goodwill — rather than buying the company as a whole.

  • Sellers may face higher taxes in asset sales because certain assets, like equipment or contracts, can trigger ordinary income treatment.

  • Goodwill and intangible assets often qualify for long-term capital gains rates, which are typically lower.

Asset sales are common, especially for smaller businesses, because buyers often prefer the cleaner structure and potential tax benefits on their side.

Stock Sale

In a stock sale, the buyer acquires your ownership shares in the company itself, assuming all assets and liabilities.

  • Sellers typically prefer stock sales because most or all of the gain is taxed at favorable capital gains rates.

  • Buyers may be less inclined toward stock sales due to the risk of inheriting liabilities.

Negotiating deal structure is part of the process — and knowing the tax implications of each approach helps you make informed decisions.

Capital Gains vs. Ordinary Income Rates

Your goal is often to have as much of the sale proceeds as possible taxed at long-term capital gains rates (usually 15% or 20%, plus a potential 3.8% net investment income tax for higher earners).

Certain components of a deal may be taxed at higher ordinary income rates, such as:

  • Earn-outs tied to future performance

  • Consulting agreements you enter into post-sale

  • Certain asset allocations (like depreciation recapture)

Planning in advance gives you the opportunity to minimize these exposures through negotiation and careful structuring.

Purchase Price Allocation in Asset Sales

In asset sales, the way the purchase price is allocated among different asset categories determines how the proceeds are taxed.

Typical categories include:

  • Goodwill (capital gains treatment)

  • Intellectual property (capital gains treatment)

  • Equipment or tangible assets (may involve depreciation recapture taxed at ordinary income rates)

  • Non-compete agreements (ordinary income)

The purchase price allocation is negotiable and should be approached strategically, with tax implications in mind.

State Tax Considerations

Where your business operates — and where you reside as the seller — also matters.

  • States like California and New York impose significant state income taxes.

  • Some states (such as Florida and Texas) have no state income tax.

If you have nexus in multiple states or sell to out-of-state customers, additional state tax considerations may apply.

In some cases, founders consider relocation well in advance to reduce tax exposure — but this requires genuine planning and time.

Timing and Installment Sales

Some deals include installment payments or earn-outs, spreading payment over time.

  • Installment sales allow taxes to be paid as payments are received, potentially reducing your tax rate in any given year.

  • Earn-outs tied to future business performance can create additional tax complexity, sometimes treated as ordinary income depending on how they are structured.

Understanding these timing issues helps you plan for cash flow and tax obligations properly.

Qualified Small Business Stock (QSBS) Exclusion

If your company is a C-corporation, you may qualify for the Qualified Small Business Stock (QSBS) exclusion, which can exempt up to $10 million (or 10 times your original investment) from federal capital gains tax.

To qualify:

  • You must have held the shares for at least five years.

  • Your company must meet size and industry requirements.

  • The stock must have been acquired directly (not purchased from another shareholder).

If your business may qualify, this exclusion could significantly reduce your tax burden — but eligibility should be reviewed with a tax advisor well before starting the sale process.

Preparing Documentation for Tax Planning

Good documentation makes tax planning easier and due diligence smoother.

Before going to market, ensure that:

  • Financial records align with tax filings

  • Adjustments to EBITDA (e.g., owner compensation) are clearly documented

  • Intellectual property ownership is clearly established

  • Contracts that affect purchase price allocation are organized and accessible

Why Work with Advisors Early

Tax law is complex — and no two deals are the same. Working with an M&A advisor, attorney, and tax professional early ensures that:

  • You understand the tax impact of different deal structures

  • You can negotiate from an informed position

  • Your net proceeds are protected

At Merge, we help founders plan for taxes as part of the overall exit strategy — so nothing is overlooked.

Final Thoughts

Understanding taxes on selling a digital product business gives you an important advantage when planning your exit.

By learning how deal structure, asset allocation, state taxes, timing, and special exclusions affect your net proceeds, you can reduce surprises and maximize the financial reward for your hard work.

At Merge, we guide founders through every step — from preparation and positioning to negotiations and closing — ensuring that tax considerations are part of the plan from day one.