So, you’re thinking about selling your SaaS business? First off—congrats. That’s no small feat. You’ve built something real. But before you sign the dotted line and pop the champagne, there’s one not-so-fun topic you need to get in front of: taxes on selling a SaaS business.

We get it. Tax conversations aren’t exactly founder fuel. But this is where you can make or lose hundreds of thousands—sometimes millions—of dollars. So let’s make it simple.

At Merge, we help SaaS founders prep for exits every day. And we’re walking you through the tax stuff the same way we walk our clients through it: no jargon, no fluff, and a few smart moves that could change your outcome completely.

Let’s dive in.

Why Taxes on Selling a SaaS Business Deserve Your Attention

You worked hard for this payday. So why give more of it away than you need to?

Understanding taxes on selling a SaaS business is about way more than filing paperwork. It’s about structuring your deal, choosing the right entity, and planning ahead so you don’t find yourself staring at a huge unexpected bill next April.

We’ve seen founders:

  • Cut their tax liability in half with QSBS

  • Avoid double taxation with smart asset vs. stock sale planning

  • Save 7+ figures just by planning one year earlier

And we’ve seen others pay dearly for not doing the same. Let’s make sure you’re in the first camp.

The Two Most Common Deal Structures—and Their Tax Impacts

There are two main ways a SaaS business is sold:

1. Asset Sale

This is when the buyer purchases specific assets (your IP, customer contracts, tech stack, etc.), not the company’s legal entity.

Pros: More common in smaller deals, gives buyers more control over what they’re buying.

Cons: Often less favorable for sellers because of how gains are taxed—especially if you’re an LLC or sole prop.

Tax Impact:

  • Assets are taxed at different rates depending on classification (e.g., equipment vs. goodwill).

  • Seller pays taxes on the gains, often as ordinary income, which can be as high as 37%.

2. Stock Sale

This is when the buyer purchases the ownership shares of your company—most common when the seller is a C-corp or S-corp.

Pros: Simpler, usually taxed at the capital gains rate (lower). Often cleaner for the seller.

Cons: Buyers inherit all liabilities, which can make them wary.

Tax Impact:

  • If you qualify for long-term capital gains, you may only pay 15%–20% federal tax.

  • If you qualify for QSBS, you might pay 0% on the first $10M.

Let’s talk about that magic acronym for a second.

What Is QSBS—and Could You Qualify?

QSBS stands for Qualified Small Business Stock. If your SaaS business is a C-Corp, and you’ve held your shares for at least five years, you might be able to exclude up to $10M in capital gains tax-free when you sell.

Yes, really.

Basic Requirements:

  • Must be a C-Corp

  • Gross assets under $50M when stock was issued

  • Active trade or business (SaaS qualifies)

  • Stock held for 5+ years

Pro Tip:

If you’re currently an LLC or S-Corp, and a sale is more than 5 years out, talk to your CPA about converting to a C-Corp now to start the QSBS clock.

At Merge, we flag QSBS potential during our first valuation snapshot. If you’re eligible—or could be—this should shape how you structure your exit strategy.

How Capital Gains Tax Works When Selling a SaaS Business

If you don’t qualify for QSBS, you’ll likely pay capital gains tax. Here’s how that breaks down:

Short-Term Capital Gains (Owned Less Than 1 Year)

  • Taxed as ordinary income (up to 37%)

Long-Term Capital Gains (Owned 1+ Year)

  • Taxed at 15% to 20% federal depending on income

  • +3.8% Net Investment Income Tax if applicable

  • +State Taxes, which vary dramatically by state

Example:
If you live in California and sell for a $5M gain, you might pay:

  • 20% federal capital gains = $1M

  • 3.8% NIIT = $190K

  • 13.3% CA tax = $665K
    Total taxes: $1.85M+

Now you see why planning ahead matters.

State Taxes: Where You Live (and Where Your Company Is) Matters

Selling your SaaS business in Texas or Florida? You might skip state income tax altogether.

Selling in New York, California, or New Jersey? Be prepared for a 9–13% state hit.

Some founders consider relocating to a tax-favorable state in the year before a sale. It’s possible, but you’ll need to show clear proof of residency, driver’s license, voter reg, etc.

Don’t try to pull a fast one. Auditors will look back to where your life actually was when the sale occurred.

What If You’re an LLC or S-Corp?

If your SaaS business is an LLC or S-Corp, it’s considered a pass-through entity, meaning income (or gains) flow through to your personal return.

That means:

  • No corporate tax—but

  • You pay individual rates on gains (capital gains or ordinary income depending on the asset)

You can elect to convert to a C-Corp before the sale to access QSBS or simplify the transaction—but this has pros and cons. Get your CPA and M&A advisor in a room before you make that call.

Installment Sales and Earn-Outs: Spreading Out the Tax Impact

If your deal includes an earn-out (where part of the price is paid after the close based on performance), or an installment sale, here’s what to keep in mind:

  • You’re taxed as payments are received

  • Can help spread your tax liability over multiple years

  • Can reduce tax bracket impact in year one

But be careful:

  • Deferred payments carry risk (what if the buyer tanks the business?)

  • The IRS still expects tax on interest earned on deferred payments

Merge tip: Structure earn-outs with milestones you control as much as possible (e.g., team staying on, tech performance) vs. buyer-led revenue targets.

Don’t Forget About Depreciation Recapture

If your business has depreciated assets (software licenses, equipment, etc.), you might face depreciation recapture taxes.

This happens when you sell an asset for more than its depreciated value. The IRS says: “You got tax breaks before. Now we want some back.”

Recapture is taxed at ordinary income rates, not capital gains. Work with your tax advisor to estimate this and factor it into your proceeds.

How Merge Helps Founders Navigate Taxes on Selling a SaaS Business

We’re not CPAs—but we are your first line of defense.

At Merge, when we do your valuation and prep your listing, we ask questions like:

  • Is your company a C-Corp, S-Corp, or LLC?

  • How long have you held equity?

  • Are you eligible for QSBS?

  • Have you thought about state tax residency?

  • What’s your timeline to exit?

We loop in your CPA and legal team early so no one’s surprised at the 11th hour. And we structure deals that make financial sense—not just headline sense.

A Quick Tax Checklist for SaaS Founders Preparing to Sell

Before you list your business or entertain offers, make sure you’ve covered:

✅ Talked to a CPA about your entity type and capital gains exposure
✅ Reviewed your QSBS eligibility
✅ Run a sale model with different deal structures
✅ Evaluated state residency and tax implications
✅ Built in provisions for installment or earn-out terms
✅ Reviewed prior depreciation on assets
✅ Set aside 25%–35% of proceeds for tax liability
✅ Aligned your legal, tax, and M&A advisors

Final Thoughts

Here’s the truth: taxes on selling a SaaS business are complicated. But that doesn’t mean they have to be stressful.

With a little foresight, the right advisors, and a deal team that puts your long-term gain first, you can walk away with clarity—and cash.

Your dream exit shouldn’t be eaten up by Uncle Sam. At Merge, we make sure founders get the full picture before they sell. We don’t just find you a buyer—we help you walk away with confidence.

Ready for a free valuation snapshot or exit planning consult? We’ll help you see what your business is worth, how a sale might be taxed, and how to keep more of what you built.