For federal income tax purposes, a trademark is a capital asset that you cannot write off in the year you pay for it. The tax treatment of trademarks is governed by Section 197 of the Internal Revenue Code, which requires you to capitalize the cost of acquiring or creating the mark and recover it through equal annual amortization deductions over 15 years. Routine costs to maintain the registration are generally deductible when paid, and selling, licensing, or abandoning the mark each triggers its own set of rules.
How the IRS Classifies a Trademark
The IRS treats trademarks, trade names, and franchises as “Section 197 intangibles,” the same category that covers goodwill, going concern value, and covenants not to compete.1Office of the Law Revision Counsel. 26 U.S. Code 197 – Amortization of Goodwill and Certain Other Intangibles That single classification drives almost everything that follows: the 15-year amortization schedule, the ordinary-income recapture when you sell, and the loss deferral rule when you abandon.
Two shortcuts business owners often reach for are closed off. Trademarks do not qualify for Section 179 immediate expensing, which is limited to tangible personal property and off-the-shelf computer software.2Internal Revenue Service. Instructions for Form 4562 (2025) And since the Tax Cuts and Jobs Act took effect in 2018, a trademark can no longer be deferred through a Section 1031 like-kind exchange, which now applies only to real property.3Internal Revenue Service. Like-Kind Exchanges – Real Estate Tax Tips The 15-year amortization schedule is essentially the only path for recovering your investment in the mark.
Capitalizing and Amortizing the Cost
Whether you buy a trademark from someone else or develop one internally, the initial outlay is a capital expenditure. You add it to the trademark’s tax basis and recover that basis through equal annual amortization deductions over 15 years, beginning in the month you acquire the asset.1Office of the Law Revision Counsel. 26 U.S. Code 197 – Amortization of Goodwill and Certain Other Intangibles The 15-year clock runs regardless of how long you actually expect to use the mark or how long its registration lasts.
Trademarks You Purchase
When you buy a trademark, the amortizable basis includes the purchase price plus legal fees, accounting fees, and other transaction costs tied to the acquisition. You claim the annual deduction on Form 4562.4Internal Revenue Service. About Form 4562, Depreciation and Amortization
Trademarks You Create
Most self-created intangibles fall outside Section 197 entirely. Trademarks are one of the statute’s explicit exceptions: design fees, trademark search costs, and legal fees for filing the registration application all get capitalized and amortized on the same 15-year schedule as a purchased mark.1Office of the Law Revision Counsel. 26 U.S. Code 197 – Amortization of Goodwill and Certain Other Intangibles
The Startup-Cost Election
If you incur trademark costs while launching a new business, a portion may come off your first-year return under Section 195. A business can elect to deduct up to $5,000 of startup costs in the year it begins active operations, with the remainder amortized over 180 months. The $5,000 allowance phases out dollar-for-dollar once total startup costs exceed $50,000 and disappears entirely at $55,000.5Office of the Law Revision Counsel. 26 U.S. Code 195 – Start-Up Expenditures
The threshold looks at the business’s total startup costs, not just the trademark spend. If you spent $40,000 on market research plus $15,000 on trademark development before opening, your immediate deduction is already shrinking.
Deducting Ongoing Costs
Once the trademark is registered, most routine costs to keep it active are ordinary business expenses deductible in the year you pay them. The distinction to hold onto: costs that maintain the trademark’s current status are deductible; costs that expand or improve the asset must be capitalized and added to basis.
Renewal and Monitoring
The USPTO requires periodic filings to keep a registration alive. You must file a declaration of continued use between the fifth and sixth year after registration, and combined renewal and declaration filings every ten years after that. Current fees run from $325 per class for a basic declaration to $650 per class for the ten-year combined filing.6United States Patent and Trademark Office. Trademark Fee Information Those fees, along with trademark monitoring services and similar administrative charges, are deductible as ordinary and necessary business expenses.
Legal Fees and the Origin-of-the-Claim Doctrine
Legal fees from trademark disputes are governed by the origin-of-the-claim doctrine: the tax treatment turns on what the lawsuit is fundamentally about, not on what you hoped to achieve. If the claim originates in protecting rights you already have, such as suing a competitor using a confusingly similar mark, the legal fees are currently deductible.
If the litigation results in acquiring new rights or expanding the trademark’s scope, those legal costs must be capitalized and added to the trademark’s amortizable basis. A suit that resolves a disputed geographic territory in your favor, giving you broader protection than you had before, is treated as an expansion of the asset rather than maintenance.
Licensing Income and Royalty Payments
Licensing creates tax consequences on both sides of the agreement. The licensor treats royalty receipts as ordinary business income in the year received. The licensee generally deducts those royalty payments as an ordinary business expense, unless Section 263A’s uniform capitalization rules require otherwise, which can happen when the mark is used in producing inventory. The licensor can also deduct the costs of running the arrangement, including fees to draft the license and to monitor the licensee’s compliance with quality standards.
For pass-through businesses and sole proprietors, trademark royalty income tied to an active trade or business may qualify for the Section 199A deduction of up to 20 percent of qualified business income. Royalties from passive investments or personal activities do not qualify, and the deduction phases out at higher incomes.
Selling or Transferring a Trademark
Disposing of a trademark can produce capital gain, ordinary income, or both, and the structure of the deal often matters more than the headline sale price.
Figuring the Gain
Start with adjusted basis: your original capitalized cost minus the amortization you have already claimed. Subtract that from the sale price to get your gain. If you have held the mark for more than a year, the gain qualifies for Section 1231 treatment, meaning it flows to long-term capital gain rates when 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 Section 1245 property, so any gain on sale is recaptured as ordinary income up to the total amortization you previously claimed. Only gain above the cumulative amortization reaches the lower capital gains rate.8Internal Revenue Service. Publication 544 (2025), Sales and Other Dispositions of Assets
An example makes this concrete. You bought a trademark for $150,000 and have claimed $50,000 of amortization, giving an adjusted basis of $100,000. You sell for $250,000, so your gain is $150,000. The first $50,000 is recaptured as ordinary income (matching the amortization you deducted); the remaining $100,000 qualifies for long-term capital gains treatment.9Office of the Law Revision Counsel. 26 U.S. Code 1245 – Gain From Dispositions of Certain Depreciable Property
The Section 1253 Traps
Two rules in Section 1253 can override capital gains treatment entirely and turn the proceeds into ordinary income. The first covers contingent payments. If the sale price depends on the trademark’s future productivity, use, or disposition, those contingent payments are treated as income from a non-capital asset, meaning 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 what the parties call the transaction. Earn-out structures are the most common place this catches sellers by surprise.
The second rule looks at what the seller keeps. If you retain any “significant power, right, or continuing interest” in the trademark, the transfer is not treated as a sale of a capital asset at all. The statute defines that phrase broadly to include the right to terminate the agreement at will, the right to approve or disapprove assignments, the right to set quality standards for products sold under the mark, and the right to require the buyer to purchase supplies from you.10Office of the Law Revision Counsel. 26 U.S. Code 1253 – Transfers of Franchises, Trademarks, and Trade Names Keeping any of these rights converts the proceeds into ordinary income.
When the Trademark Is Sold With a Business
A trademark sold as part of an entire business is priced through the residual allocation method under Section 1060.11Office of the Law Revision Counsel. 26 U.S. Code 1060 – Special Allocation Rules for Certain Asset Acquisitions The trademark sits in Class VI (Section 197 intangibles other than goodwill and going concern value), and goodwill picks up whatever remains after the earlier classes.
Buyer and seller each file Form 8594 with their return for the year of the sale. A written allocation the parties agree to is binding on both sides for tax purposes: it fixes the buyer’s amortizable basis in the mark and the seller’s gain or loss on that specific asset.12Internal Revenue Service. Instructions for Form 8594 (11/2021) Because the numbers drive opposite tax outcomes, the Form 8594 allocation is often as contested as the purchase price itself.
The 3.8 Percent Net Investment Income Tax
Gain from a trademark sale can also be exposed to the 3.8 percent net investment income tax if your modified adjusted gross income exceeds $200,000 (single) or $250,000 (married filing jointly). These 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 sale proceeds land inside or outside the tax depends on how actively you were involved in the business that used the mark.
Abandoning a Worthless Trademark
Not every trademark ends in a sale. Brands get discontinued, product lines get shelved, registrations lapse. To claim an abandonment loss you generally need to show that you owned the asset, intended to abandon it, and took an affirmative step to give it up. For an intangible, that usually means a documented act of abandonment rather than simply letting the USPTO registration lapse through inattention. The loss equals the trademark’s adjusted basis at the time of abandonment.
Section 197(f)(1) then puts a heavy thumb on the scale. If you abandon or write off one Section 197 intangible but still hold other Section 197 intangibles acquired in the same transaction, you cannot recognize the loss. The abandoned trademark’s remaining basis gets added to the basis of the intangibles you retained, and you recover it 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 nothing shows up on the current-year return.
This rule bites hardest when the trademark came in as part of a business purchase that also included goodwill, customer lists, or a covenant not to compete. Killing off the trademark on its own gives you no immediate deduction while you are still amortizing the goodwill from the same deal.