Many people celebrated a major reduction in several tax rates in the recently enacted Tax Cuts and Jobs Act (TCJA). However, some patent holders are not so elated.
Until the passage of TCJA, the tax code treated patents like capital assets. While patents were not defined at capital assets, they were treated as such in terms of how they were taxed when sold. In a way, this afforded them special tax treatment. Specifically, when a patent was sold, profit from the sale was treated like a capital gain. This meant that the profit was taxed at the long-term capital gains tax rate, even though patents were not defined as capital assets.
Under the TCJA, tax law will no longer treat patents as capital assets. Profits gained from the sale of patents can no longer be taxed at the capital gains tax rate. To be fair, the TCJA's treatment of profit from the sale of patents is more consistent with the definition of capital assets within the tax code. On the other hand, this offends a widely-held philosophy that patent rights are property rights. This provision of the TCJA will likely increase the tax burden for income generated from the creation and sale of patents.
However, all hope is not lost for patent holders. The TCJA also cut the tax rate for some types of revenue derived from patents. Revenue derived from foreign patents, such as royalties, held in the U.S. is now taxed at less than half the rate than before the TCJA. This provides an incentive for patent holders to move revenue-generating foreign patents from foreign countries to the U.S. in order to take advantage of the tax rate reduction.
Further, while losing the capital gains treatment of patent sales stings, the reduction of the corporate tax rate should soften the blow.
As a final note, always consult a tax professional to determine the optimum tax strategy with respect to your own patent assets.