338(h)(10) Election

Most founders have never heard of a 338(h)(10) election until their M&A attorney drops it into a conversation like everyone should know what it means. Here's the truth: this obscure tax provision can swing your after-tax proceeds by millions of dollars. It's worth understanding before you're sitting at the closing table wondering what just happened.

A 338(h)(10) election is a joint tax election that allows a stock sale to be treated as an asset sale for federal income tax purposes. The name comes from Section 338(h)(10) of the Internal Revenue Code, and while it sounds like alphabet soup, the concept matters enormously when you're selling your company.

Here's the core tension in any M&A deal: sellers typically want to sell stock, while buyers typically want to buy assets. Each structure creates dramatically different tax consequences for both parties. When you sell stock, you get capital gains treatment. When a buyer acquires assets, they get stepped-up basis for future tax deductions. The 338(h)(10) election bridges this gap, allowing a stock purchase to be treated as an asset purchase for tax purposes.