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Fishing Taxable Exchanges

When you dispose of business property, your taxable gain or loss is usually an IRC section 1231 gain or loss. Its treatment as ordinary or capital is determined under rules for section 1231 transactions.

Gain or loss on the sale or exchange of amortizable intangible property held longer than 1 year (other than an amount recaptured as ordinary income) is a section 1231 gain or loss. Gain or loss on dispositions of other intangible property is ordinary or capital depending on whether the property is a capital asset or a noncapital asset. A fishing permit acquired before the amortization rules changed (see note) is a capital asset and any gain or loss remains capital.

(Note: IRC section 197(d)(1)(D) allows amortization of permits/licenses. Fishing permits/licenses acquired after August 10, 1993 or if an election was made property acquired after July 21, 1991 are eligible for amortization.)

Gains

If you sell your fishing permit/license that results in a profit/gain, the gain is taxed. For example, assume the following facts:

  • Permit purchased for $50,000
  • Amortization claimed on returns $26,665
  • Remaining basis $23,335 ($50,000 cost minus $26,665 amortization = $23,335 remaining basis)

Example 1: If you sell the permit for $40,000, you will have a gain of $16,665 ($40,000 selling price minus $23,335 basis = $16,665). Since amortization recapture is treated as ordinary income, the gain is not eligible for the more beneficial capital gain treatment. The rate of tax that you must pay on this $16,665 will depend upon your other income and the tax bracket at which this income is taxed. The tax rate will not be the 20% long-term capital gains rate.

Example 2: If you sell the permit for $60,000, you will have a gain of $36,665 ($60,000 selling price minus $23,335 basis = $36,665). In this situation, the amount of the gain representing the prior amortization claimed, or $26,665, will be taxed at the ordinary income rates as explained in Example 1. The remaining $10,000 gain, representing the amount received in excess of the original cost of the permit, is taxed at the 20% capital gain rates. The maximum capital gain rate of 20% does not apply if it is higher than your regular tax rate.

In some cases, the permit may have been received with no cost. The yearly renewal fee would normally be deducted on a business return (Form Schedule C), as a license expense, so does not affect the basis. Gains would be paid on selling price of the permit.

Losses

If you sell your fishing permit/license that results in a loss, the loss is deductible. For example, assume the following facts:

  • Permit purchased for $50,000
  • Amortization claimed on returns $26,665
  • Remaining basis $23,335 ($50,000 cost minus $26,665 amortization = $23,335 remaining basis)

Example 1: If you sell the permit for $20,000, you will have a loss of $3,335 ($20,000 selling price minus $23,335 basis = $3,335). The loss is deductible as an ordinary loss.

Example 2: Assume the permit was purchased in 1991 and no election was made to amortize the permit. If you sell the permit for $20,000, you will have a loss of $30,000 ($20,000 selling price minus $50,000 basis = $30,000). A fishing permit is a capital asset. IRC section 1221 defines a capital asset to mean property held by the taxpayer whether or not connected with his trade or business, but it does not include - section 1221(a)(2) property used in his trade or business which is subject to the allowance for depreciation (section 167 or 197). In this situation, the sale remains a section 1221 property and must be reported on Schedule D as a long-term capital loss

The sale of business assets is reported on Form 4797, Sale of Business Property.

Buy-Back of Fishing Permits/Licenses.

Money received for the buy back of a fishing license is a sale. The disposition must be reported on your tax return and may be taxable income or a loss as explained in the prior examples. There is no tax law that allows these funds to be excluded from income.

The amount that would be reported is the following:

Sales Price (buy back amount) – Cost (the amount you purchased your permit) – Previously Claimed Amortization = Gain/Loss to report.

Normally if you did not purchase your permit, then the total buy back amount would be taxable income in the year received.

Condemnations

If a fishing permit/license is condemned then follow the rules under Involuntary Conversions, IRC Section 1033. See Publication 544, Sales and Other Dispositions, Chapter 1, "Condemnations" for more information.

If your property was condemned or disposed of under the threat of condemnation, figure your gain or loss by comparing the adjusted basis of your condemned property with your net condemnation award. See prior examples to figure gain or loss.

If your net condemnation award is more than the adjusted basis of the condemned property, you have a gain. You can postpone reporting gain from a condemnation if you buy replacement property. The replacement period starts with the date of disposition and ending not earlier than two years after the close of the first taxable year in which any part of the gain from the condemnation is realized.

If your net condemnation award is less than your adjusted basis, you have a loss. You must report any deductible loss in the tax year it happened.


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Page Last Reviewed or Updated: 06-Oct-2014