When transferring patent rights, most other terms of the agreement are usually determined before the parties begin discussing a license royalty rate. For a sale or assignment of a patent, the price is generally the controlling term. However, one must also consider the tax consequences of a patent transfer, because this factor may impact the nature of the transfer and the amount of income the patent holder receives after taxes.

Section 1235 of the Internal Revenue Code states that a transfer by a patent holder of all substantial rights in the patent is treated as a sale or exchange of a capital asset held for more than one year, i.e., as a long-term capital gain. For year 2013, long-term capital gains are taxed at 15 percent, compared to marginal tax brackets of up to 39.6 percent. Thus, applying §1235 can provide substantial tax benefits.

To benefit from §1235, however, one must keep in mind that it does not apply to all patent transfers or licenses. Several requirements must be met, namely, (1) transfer of a patent, (2) the transfer is for all substantial right or an undivided interest therein, and (3) by a holder. Each of these requirements is discussed below.