Selling Your Company for Stock: Tax-Free Merger or Cash Sale

By Yarik Yarosh, CPA ·September 5, 2026 ·Updated October 16, 2026 ·7 min read

Written by Yarik Yarosh, CPA (US & Canada) September 5, 2026 · FL CPA license AC61704 · CPA Ontario

If a buyer pays for your company with its own stock, the deal can be tax-free. If it pays cash, you’re taxed now. In a deal that qualifies as one of the IRC 368 reorganization types, you recognize no gain on stock you swap for the buyer’s stock, and your old basis carries over to the new shares, so the gain waits until you sell them. Cash or other property on top (boot) is taxed, but only up to the value of the cash and property. In the example below, a $10 million all-cash sale with a $1 million basis triggers about $2.1 million of federal tax up front, while the all-stock merger triggers none. The deal has to fit the statute and the judicial doctrines, or the whole thing is taxable.

✓Key takeaway

Seven types of tax-free reorganizations:

Type	Name	Description	Consideration
A	Statutory merger/consolidation	Target merges into acquirer under state law	Stock (+ limited boot)
B	Stock-for-stock	Acquirer obtains control of target by exchanging solely voting stock	Must be solely voting stock (no cash except for fractional shares)
C	Stock-for-assets	Target transfers substantially all assets to acquirer for voting stock	Must be solely voting stock (with limited boot exception)
D	Acquisitive or divisive	Transfer of assets between controlled corporations	Varies
E	Recapitalization	Restructuring of a single corporation’s capital structure	Stock for stock/debt within same corporation
F	Mere change in form	Change in identity, form, or place of organization	Must be one corporation
G	Bankruptcy reorganization	Transfer of assets in a Title 11 bankruptcy proceeding	Stock (+ limited boot)

Key judicial doctrines (all must be satisfied):

Doctrine	Requirement
Continuity of interest (COI)	Target shareholders must receive a substantial portion of their consideration in acquirer stock (IRS safe harbor: at least 40% stock)
Continuity of business enterprise (COBE)	Acquirer must continue the target’s historic business OR use a significant portion of target’s historic business assets
Business purpose	Transaction must have a legitimate business purpose beyond tax avoidance
Step transaction doctrine	IRS may collapse multiple steps into one transaction to test whether the overall transaction qualifies

How do tax-free reorganizations work?

Hypothetical example

Round numbers. Company A (acquirer, publicly traded) wants to acquire Company B (target, closely held) valued at $10,000,000. The sole owner of Company B has a basis of $1,000,000 in their stock.

Taxable acquisition (stock purchase for cash):

Item	Amount
Sale price	$10,000,000
Owner’s basis	$1,000,000
Capital gain	$9,000,000
Federal tax (20% LTCG + 3.8% NIIT)	$2,142,000
State tax (5%)	$450,000
Total tax	$2,592,000
After-tax proceeds	$7,408,000

Type A reorganization (statutory merger, 100% stock): Company B merges into Company A under state merger law. The owner receives $10,000,000 worth of Company A stock.

Item	Amount
FMV of Company A stock received	$10,000,000
Owner’s basis in Company A stock	$1,000,000 (carryover from Company B stock)
Gain recognized	$0
Tax in current year	$0
Built-in gain deferred	$9,000,000

The owner’s basis in the Company A stock is $1,000,000 (the same basis they had in Company B stock). If the owner later sells the Company A stock for $10,000,000, they recognize the full $9,000,000 gain at that time. But the deferral provides time value of money benefits and the flexibility to sell incrementally.

Type A with boot (50% stock + 50% cash): The owner receives $5,000,000 in Company A stock and $5,000,000 in cash.

Item	Amount
Total consideration	$10,000,000
Boot (cash) received	$5,000,000
Gain recognized (lesser of: total gain or boot received)	$5,000,000
Gain deferred	$4,000,000
Tax on recognized gain (23.8%)	$1,190,000
Basis in Company A stock	$1,000,000 + $5,000,000 recognized gain - $5,000,000 cash = $1,000,000

Type B (solely voting stock):

Requirement	Type B is the Strictest
Consideration	Must be SOLELY voting stock of the acquirer (no cash, no assumption of liabilities beyond the target’s own)
What “solely” means	Even a small amount of cash disqualifies the entire transaction
Fractional shares	Cash in lieu of fractional shares is generally acceptable
Result	Acquirer must obtain “control” (80% of voting + 80% of each class) of target
Target survives	Target becomes a subsidiary of acquirer
Owner’s basis	Substituted basis (old basis carries over to new stock)

Type C (stock-for-assets):

Requirement	Rule
Assets acquired	”Substantially all” of target’s assets (IRS ruling guideline: 90% of FMV of net assets, 70% of FMV of gross assets)
Consideration	Must be solely voting stock (but boot up to 20% of FMV of target’s assets is permitted if at least 80% is voting stock)
Liabilities assumed	Disregarded if the only consideration is voting stock; if any money or other property is also paid, they count as money for the 20% test
Target liquidates	Target must distribute everything to its shareholders

When each type is preferred:

Situation	Best Type	Why
Clean merger, both parties agree	Type A	Most flexible on consideration (stock + cash)
Acquirer wants target as subsidiary	Type B	Target survives as subsidiary
Target has significant unwanted liabilities	Type C	Acquirer picks assets, not all liabilities
Internal restructuring	Type D or E	No outside party needed
Changing state of incorporation	Type F	Simplest; single corporation
Bankruptcy context	Type G	Special rules for bankruptcy

Type E (recapitalization) examples:

Transaction	Tax-Free?
Common stock exchanged for preferred stock	Yes (stock for stock)
Bonds exchanged for stock	Yes (reduces debt; strengthens capital structure)
Stock exchanged for bonds	Partially (excess principal received = boot)
Preferred stock exchanged for common stock	Yes

Type D (divisive reorganization, spin-off/split-off/split-up):

Form	How It Works
Spin-off	Parent distributes subsidiary stock to all shareholders pro rata
Split-off	Parent distributes subsidiary stock to some shareholders in exchange for their parent stock
Split-up	Parent transfers assets to two or more new corporations and liquidates

Requirements for tax-free treatment (IRC 355):

Requirement	Rule
Control	Distributing corporation must control the subsidiary (80%) immediately before the distribution
Active trade or business	Both the distributing and controlled corporations must be engaged in an active trade or business conducted for at least 5 years
Not a device	Cannot be used principally as a device to distribute E&P
Business purpose	Must have a legitimate corporate business purpose

Planning considerations:

Factor	Impact
Lock-up agreements	Target shareholders often agree not to sell acquirer stock for a period (protects COI)
Escrow arrangements	Cash in escrow for indemnification may be treated as boot
Earn-outs	Contingent consideration (earn-outs) payable in stock can qualify if properly structured
Dissenters’ rights	Cash paid to dissenting shareholders may be treated as boot
Pre-transaction dividends	A dividend paid by the target shortly before the reorganization may be recharacterized

Illustrative numbers only, not a real client and not advice for your facts.

Related guides:

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Cite this page

Yarik Yarosh, CPA. "Selling Your Company for Stock: Tax-Free Merger or Cash Sale." Blue Cloud CPA, September 5, 2026, updated October 16, 2026. https://bluecloudcpa.com/guides/small-business-tax-free-reorganizations-irc-368-mergers

This guide is general information, not tax advice for your specific situation. Which points apply, and how, depends on your facts.