DC capital gains tax is among the highest in the country for an owner who lives in the District, because the gain from a business sale is taxed as ordinary income at rates that reach 10.75 percent. The District also taxes many businesses at the entity level, including partnerships and LLCs, which changes the math on an asset sale. Owners who talk with Washington DC business brokers usually start with price, but in this market what you keep depends heavily on your entity type, the deal structure and which side of the District line you live on.
Owners of franchised units who have read how franchise brokers in Washington DC approach a resale know that buyers negotiate structure as hard as price. This guide covers the tax side of that same transaction: District income tax, the unincorporated business franchise tax, the corporate franchise tax, the federal tax and a short note on Maryland and Virginia for owners who live there. It is general information, not tax advice, so confirm every point with your CPA and tax attorney.
Important: Raincatcher is an M&A advisory firm. We are not CPAs, tax advisors or attorneys, and this article is general information, not tax, legal or financial advice. Tax rules change and depend on your facts, so talk with your own CPA and attorney before you make decisions about selling your business.
Does DC Have a Capital Gains Tax?
The District does not have a separate capital gains tax. Capital gains are included in District taxable income and taxed at the same graduated rates as wages, so a large gain from selling a business is taxed mostly in the top brackets. For tax years beginning after 2021, the District’s individual rates are:
- 8.5 percent on taxable income from $60,000 to $250,000
- 9.25 percent from $250,000 to $500,000
- 9.75 percent from $500,000 to $1,000,000
- 10.75 percent above $1,000,000
There is no reduced rate for long-term gains, so for a District resident the DC capital gains tax on a seven-figure sale lands mostly at 10.75 percent.
How DC Business Franchise Taxes Apply to a Sale
The District taxes many businesses directly, and that layer often matters more than the individual DC capital gains tax.
The unincorporated business franchise tax
Partnerships, LLCs taxed as partnerships and sole proprietorships with gross income over $12,000 generally owe the unincorporated business franchise tax. The rate has been 8.25 percent of taxable income since tax year 2018, and the D.C. Code sets no different rate for later years, though the Office of Tax and Revenue’s published rate table runs only through 2025, so confirm the 2026 rate with your CPA. The tax is figured after a salary allowance for owners of 30 percent and a $5,000 exemption. Businesses are exempt when more than 80 percent of gross income comes from the personal services of the members and capital is not a material income-producing factor.
No terminating business exclusion
Until 2020, a business that sold its assets and wound up could often avoid this tax on the gain under a regulatory exclusion. For tax years beginning on or after January 1, 2021, the District changed the definition of taxable income so that gain from selling assets is taxable even when the sale ends the business. An asset sale by a District LLC or partnership can therefore produce an entity-level tax on the gain before anything reaches the owners.
S corporations are corporations in the District
The District does not follow the federal S corporation election. Its corporate franchise tax instructions state that, for District purposes, an S corporation is a C corporation, so an S corporation files Form D-20 and pays corporate franchise tax on its net income, also at 8.25 percent, the rate in effect since 2018. An asset sale by an S corporation operating in the District can be taxed at the entity level here even though the federal gain passes through to the shareholders.
Residents, Nonresidents and DC Capital Gains Tax
The Home Rule Act bars the District from taxing the personal income of nonresidents, so an owner who lives in Maryland or Virginia does not pay District individual income tax on the gain. That limit does not protect the business itself. Courts have upheld the unincorporated business franchise tax on income of nonresident owners, because Congress created that tax, and the corporate franchise tax applies to corporations regardless of where the shareholders live.
A note for Maryland and Virginia residents
Metro owners who live outside the District pay income tax where they live. Maryland’s 2025 budget law added a 6.25 percent bracket and a 6.5 percent top bracket for high earners, raised the cap on county income tax to 3.3 percent, and created a 2 percent surtax on net capital gains for taxpayers with federal adjusted gross income over $350,000, for tax years beginning after 2024. Property used in a trade or business that was eligible for expensing under Section 179 is among its exclusions. Virginia taxes most capital gains as ordinary income, with a top rate of 5.75 percent on taxable income above $17,000. In either state, ask your CPA how credits work if the District taxes the business on the same gain.
The Federal Capital Gains Tax on a Business Sale
The federal tax applies wherever you live. Gain on assets held longer than one year is taxed at long-term rates of 0, 15 or 20 percent depending on taxable income. For 2026, the 20 percent rate starts at $613,700 of taxable income for married couples filing jointly and $545,500 for single filers.
Other federal taxes that can apply
- Net investment income tax. A 3.8 percent tax applies to net investment income once modified adjusted gross income passes $250,000 for joint filers or $200,000 for single filers. Owners who materially participate in the business are often outside it on the operating gain, but passive owners and real estate held outside the company can be caught.
- Depreciation recapture. Gain equal to depreciation you have already taken on equipment is taxed as ordinary income at rates up to 37 percent. Unrecaptured gain on depreciated real estate is taxed at a maximum federal rate of 25 percent.
Asset Sale vs Stock Sale: How Structure Changes Your Taxes
Asset sales and stock sales are taxed very differently, and in the District the gap is wider than usual. Most lower middle market buyers prefer to buy assets, because they get a stepped-up tax basis and can depreciate or amortize what they pay.
Why sellers usually prefer a stock sale
In a stock sale or a sale of membership interests, the owners sell their equity and the company does not sell its assets, so the entity-level District tax on asset gain is generally not triggered. The seller pays federal tax on the gain and, if a District resident, District individual tax. In an asset sale, the company recognizes the gain first, and for a District corporation or unincorporated business that can mean 8.25 percent at the entity level before the owners pay their own tax.
The double tax problem
A C corporation that sells its assets is taxed twice, once at the corporate level and again when proceeds are distributed. Because the District treats S corporations as C corporations for its own tax, District S corporation owners can face a partial version of the same problem on an asset sale. That makes structure a negotiation worth having early, and the price should reflect who carries the tax cost.
How Purchase Price Allocation Affects What You Keep
In an asset sale, buyer and seller agree how the price is split across asset classes and report it to the IRS on Form 8594. That allocation decides how much of your gain is capital gain and how much is ordinary income at the federal level.
Goodwill and other intangible value usually produce capital gain. Equipment produces recapture, inventory and receivables produce ordinary income, and a large payment for a non-compete or a consulting agreement is ordinary income to you. For a District resident, the allocation matters less at the District level, since all of it is taxed at the same rates, but it still moves the federal bill. Negotiate the allocation schedule as part of the letter of intent.
Tax Planning Steps Before You Sell
The best planning for DC capital gains tax and federal tax happens before a buyer is at the table. These are the steps worth discussing with your CPA and attorney early:
- Confirm how the District classifies your entity. An S corporation is a corporation for District tax, and an LLC may owe the unincorporated business franchise tax unless the personal services exemption applies.
- Model asset and stock structures. Compare after-tax proceeds under both, including the entity-level District tax on an asset sale.
- Plan the allocation. Decide what allocation you can accept before the letter of intent.
- Consider an installment sale. Spreading payments across tax years can spread the federal tax, though seller financing carries credit risk.
- Look at rollover equity. When a private equity buyer offers rollover, the rolled portion can often be structured to defer tax until a later sale.
- Check small business stock rules. C corporation stock that meets federal qualified small business stock requirements may exclude some or all of the federal gain.
- Treat residency changes carefully. A move from the District to Maryland or Virginia has to be real and well documented, and it does not remove District entity-level taxes on the business.
Frequently Asked Questions
What is the DC capital gains tax rate?
The DC capital gains tax rate is the same as the District’s ordinary income tax rate, because the District has no separate rate for capital gains. Rates rise to 9.75 percent above $500,000 and 10.75 percent above $1,000,000 of taxable income.
Does DC tax a business sale if I live in Maryland or Virginia?
The District cannot tax a nonresident’s personal income, so a Maryland or Virginia resident does not pay District individual tax on the gain. The business can still owe the District’s corporate or unincorporated business franchise tax on an asset sale.
Does the DC unincorporated business franchise tax apply to selling my business?
The DC unincorporated business franchise tax can apply to selling your business when an LLC or partnership sells its assets. Since 2021, gain from selling assets is taxable even when the sale terminates the business, at a rate that has been 8.25 percent since 2018.
Working With Raincatcher
Raincatcher is a sell-side business brokerage and M&A advisory firm that works with owners of companies doing $2M to $50M in annual revenue. We work alongside your CPA and attorney so that entity questions, structure and allocation are settled early, and we run a competitive process that gives owners across the District, Northern Virginia and suburban Maryland room to negotiate terms that protect what they keep after taxes.
