Allocation of Purchase Price & Taxes When Selling a Business

With the global iGaming market projected to reach $107.6 billion in 2025 and potentially $150 billion by 2029, merger and acquisition activity in this sector continues to accelerate. According to recent industry analysis, strategic partnerships and acquisitions remain among the top trends driving iGaming business development, with operators seeking to enter new markets, acquire cutting-edge technologies, and expand their product portfolios through M&A activity.

Amid negotiations over headline prices, working capital adjustments, and earn-out provisions, one critical element often gets pushed to the periphery of deal discussions—until it suddenly threatens to derail the entire transaction: purchase price allocation (PPA).

The Internal Revenue Code requires that every dollar of your transaction be categorized into specific asset classes, each carrying different tax implications. The allocation determines whether you’ll be taxed at favorable capital gains rates or face ordinary income treatment with significant recapture obligations. For iGaming businesses with valuable player databases, proprietary betting platforms, and established brand equity, getting this allocation right can mean the difference between a profitable exit and a disappointing outcome.

Understanding IRS Requirements for Gaming Business Sales

Section 1060 of the tax code mandates that both buyer and seller in an asset transaction must allocate the purchase price across seven distinct asset classes using IRS Form 8594. This isn’t optional, and the consequences of misalignment between parties can be severe. Each party must file their version with their tax return, and when those versions don’t match, it sends up red flags that can trigger audits and costly reconciliation processes.

Why does the IRS care so much about how you divide up your iGaming sale proceeds? The answer lies in the dramatically different tax treatment each asset class receives. For sellers, the distinction between capital gains treatment on goodwill versus ordinary income recapture on depreciated equipment can swing your after-tax proceeds by hundreds of thousands—or even millions—of dollars. A gaming server farm that’s been fully depreciated over several years will trigger ordinary income recapture when sold, while goodwill representing your brand value and assembled player base typically qualifies for more favorable long-term capital gains rates.

From the buyer’s perspective, the allocation determines their future tax deductions. Higher allocations to depreciable assets and Section 197 intangibles mean larger deductions in subsequent years, improving cash flow and return on investment. This creates an inherent tension in negotiations: sellers generally want maximum goodwill allocation while buyers prefer allocating more value to depreciable assets like software, player databases, and equipment.

The Strategic Importance of Form 8594 Coordination

Neither party is legally required to report identical numbers on Form 8594, but experienced iGaming business brokers and tax advisors strongly recommend matching schedules. When the IRS sees divergent allocations, they gain discretion to impose their own numbers—usually ones that benefit neither party. The best practice involves negotiating and documenting the allocation schedule before closing, then attaching it as an exhibit to your definitive purchase agreement.

Stock vs. Asset Deals: Choosing the Right Structure for Your iGaming Transaction

The structure you choose for your iGaming business sale fundamentally shapes the tax outcome, liability exposure, and regulatory complexity. Understanding the tradeoffs between stock and asset deals helps you negotiate from a position of strength and avoid surprises during due diligence.

Stock Sale Structure

In a stock transaction, ownership shares of your gaming entity (whether it’s “AlphaBet N.V.” or another corporate structure) transfer to the buyer. The company remains intact as a legal entity, and the buyer inherits everything—both assets and liabilities, both known and latent. This structure often appeals to sellers for several compelling reasons.

The purchase price primarily attaches to equity, typically qualifying for long-term capital gains treatment if you’ve held the shares for more than one year. This can result in federal tax rates as low as 20% (plus applicable state taxes and net investment income tax), compared to ordinary income rates that can exceed 37%. You achieve a clean break from the business, transferring all future obligations and potential liabilities to the buyer.

However, stock deals come with significant downsides for buyers. They receive no step-up in basis for the underlying assets, which means they can’t claim fresh depreciation deductions. They also inherit all historical liabilities, including potential tax exposure, regulatory issues, or player disputes that haven’t yet materialized. In the heavily regulated iGaming industry, jurisdictions like Malta, Gibraltar, New Jersey, and Ontario often require pre-approval from gaming authorities before share transfers can complete, potentially adding months to your closing timeline.

Asset Sale Structure

An asset transaction allows the buyer to cherry-pick what they’re acquiring—your player database, proprietary source code, brand assets, servers, and select contracts—while leaving behind unwanted liabilities and obligations in your existing entity. The buyer writes up most assets to fair market value, creating a stepped-up basis that generates valuable depreciation deductions while isolating pre-closing risks.

For iGaming businesses, assets typically include your betting platform software, player relationship data, gaming licenses (where transferable), domain names and brands, server infrastructure, and affiliate networks. Buyers love this structure because they can claim Section 197 amortization on intangible assets over 15 years while depreciating tangible property over shorter periods.

The seller’s perspective on asset deals is less rosy. You face ordinary income recapture on tangible assets like servers and equipment that you’ve previously depreciated. If your transaction involves physical terminals or servers located in U.S. states, you may trigger state sales tax obligations. The tax bite on asset sales can be substantially higher than stock deals, particularly when significant equipment or inventory transfers hands.

Despite these drawbacks, many smaller iGaming studios, affiliate networks, and niche operators find that tax economics still favor asset sales once all factors are considered. The key lies in sophisticated allocation strategies that maximize capital gains treatment where possible.

Breaking Down the Seven Asset Classes in iGaming Transactions

Form 8594 requires allocating your purchase price across seven distinct asset classes, each with specific tax implications for both parties. Understanding how iGaming assets map to these categories is essential for structuring advantageous deals.

Class I – Cash and Cash Equivalents

This category includes euro balances in payment processor accounts, funds held in player wallets, or working capital reserves. In most iGaming transactions, cash rarely transfers; instead, working capital adjustments normalize the balance sheet to agreed levels at closing. When cash does transfer, it moves at face value with no gain or loss recognized by either party.

Class II – Actively Traded Securities

Treasury bills or other securities held as player fund safeguards fall into this class. Many jurisdictions require iGaming operators to maintain segregated player funds in liquid securities. These assets are typically excluded from transactions or transferred at par value, generating minimal tax impact.

Class III – Accounts Receivable

Outstanding B2B skin royalties, affiliate commissions due, or payments owed from platform partnerships belong here. Sellers often retain these receivables and collect them post-closing rather than including them in the purchase price. When transferred, they’re valued at face amount less any required reserves, with minimal gain until collection occurs.

Class IV – Inventory

For iGaming businesses, inventory might include unredeemed gift cards, branded merchandise, or promotional materials. Hardware inventory like VR headsets or betting kiosks also falls into this category. These items are typically allocated at cost or slightly marked up to market value, generating little taxable gain for the seller but providing buyers with deductible basis when items are sold or consumed.

Class V – Tangible Property

This class captures physical assets with substance: data center racks and servers, office equipment, company vehicles, and retail kiosks for sports betting operations. Fair market value (often using replacement cost methodology) determines the allocation. Sellers face ordinary income recapture to the extent these assets were previously depreciated, while buyers can claim fresh depreciation over the assets’ remaining useful lives. In certain jurisdictions, tangible property transfers may also trigger state sales tax obligations that buyers must factor into their total acquisition costs.

Class VI – Intangible Assets (Other than Goodwill)

The iGaming industry is intellectual property-intensive, making this category particularly important. Class VI includes your betting platform source code, proprietary algorithms, gaming licenses and permits, domain names and URLs, player databases and analytics, content libraries, and non-compete agreements with key personnel.

Non-compete covenants typically receive limited allocation—often the minimum required to make them enforceable—and generate ordinary income for the seller. The bulk of Class VI allocation usually goes to software, technology IP, and player relationship data. For sellers, these intangibles generally produce capital gains if held for more than one year. Buyers amortize them over 15 years under Section 197, providing steady tax deductions throughout the holding period.

Valuing these intangibles requires sophisticated methodology. Player databases are often valued using discounted cash flow analysis, projecting revenue and profitability per active player while factoring in annual attrition rates. Proprietary software may be valued using cost to recreate, market royalty rates, or income approaches. Brand assets frequently rely on relief-from-royalty calculations, estimating the value of owning rather than licensing your brand name.

Class VII – Goodwill and Going Concern Value

Class VII serves as the residual category—whatever purchase price remains after allocating to Classes I through VI lands here. Goodwill represents intangible value that can’t be separately identified: your assembled workforce, management team expertise, synergies the buyer expects to realize, market position and competitive advantages, and player lifetime value beyond contractual relationships.

For sellers, goodwill allocation is ideal because it qualifies for long-term capital gains treatment with no recapture. A €50 million exit with €40 million allocated to goodwill means the vast majority of proceeds receive favorable tax rates. Buyers can still amortize goodwill over 15 years under Section 197, though they often prefer allocating more value to Class V and VI assets that might depreciate faster.

The negotiation over goodwill versus depreciable assets represents the central tension in most iGaming M&A transactions. Finding the balance that makes economic sense for both parties while maintaining defensible valuations is where experienced business brokers and tax advisors earn their fees.

Smart Negotiation Strategies for iGaming Business Brokers

Successfully navigating purchase price allocation requires strategic thinking from the earliest stages of your M&A process. These battle-tested approaches can help you optimize outcomes while maintaining productive relationships with potential buyers.

Delay Specific Allocation Discussions Early in the Process

Your confidential information memorandum or teaser document should cite “fair market value to be determined by independent appraisal” rather than committing to specific allocation figures. Locking yourself into a high equipment valuation during preliminary discussions can artificially reduce your capital gains cushion when final negotiations occur. Keep flexibility in your early discussions, focusing on headline valuation and general deal structure rather than granular asset-by-asset breakdowns.

Model After-Tax Proceeds, Not Just Headline Price

This cannot be overstated: the number that matters is what you actually take home after tax, not the figure that appears in press releases. A €50 million offer that yields €40 million after taxes is objectively worse than a €48 million bid structured to generate €43 million net. Run detailed pro forma tax calculations on every serious proposal, factoring in federal taxes, state taxes where applicable, net investment income tax, and any recapture obligations. Your iGaming business broker should be able to model multiple scenarios showing how different allocation approaches impact your bottom line.

Coordinate Early with Gaming Regulators

In certain European Union member states and other jurisdictions, transferring player databases triggers mandatory data protection filings under GDPR and similar privacy frameworks. Delayed regulatory approval can shift your transaction’s closing date across tax years, potentially altering when taxes become due and what rates apply. Factor these timing considerations into your transaction calendar and initiate regulatory communications well before anticipated closing dates.

Draft and Attach the Allocation Schedule Before Signing

The definitive purchase agreement should include the allocation schedule as an exhibit, not as something to be determined later. This forces both parties to confront allocation issues while they still have leverage and motivation to reach agreement. Include mechanisms to adjust allocations proportionally if earn-outs crystallize, inventory levels change, or working capital adjustments modify the final purchase price. Your agreement should specify how to recalculate allocations under various scenarios, preventing disputes when actual closing numbers differ from projections.

Engage Independent Valuation Specialists

For transactions exceeding several million euros, investing in professional valuation opinions for major intangible assets provides multiple benefits. Third-party appraisals offer defensibility if the IRS later questions your allocation. They provide objective support during negotiations with buyers who may challenge your suggested allocations. Formal valuations also satisfy accounting requirements for purchase price allocation under IFRS 3 or ASC 805, which many acquirers must follow for financial reporting.

Balancing Seller and Buyer Interests in Deal Structure

Every purchase price allocation involves inherent conflicts between seller and buyer objectives. Understanding these dynamics helps you structure proposals that address both parties’ core concerns while reaching mutually acceptable terms.

Seller-Friendly Approach: Maximizing Goodwill Allocation

Allocating the maximum defensible amount to Class VII goodwill serves seller interests by minimizing ordinary income recapture and maximizing capital gains treatment. If you can justify allocating 70-80% of your purchase price to goodwill and going concern value, your tax burden drops substantially compared to scenarios where significant value is allocated to depreciated equipment or ordinary income assets.

The advantages are clear: simplified negotiations with fewer line items to argue over, minimal recapture obligations, and maximum capital gains treatment. However, this approach has downsides. Buyers receive less favorable tax treatment with slower deductions, potentially reducing the net present value of the acquisition from their perspective. This can translate to lower offers or harder negotiating positions on other deal terms. High goodwill allocations may also face IRS scrutiny if they appear disproportionate to industry norms or lack supporting documentation.

Buyer-Friendly Approach: Emphasizing Depreciable Assets

Buyers naturally prefer allocating more purchase price to tangible property and separately identifiable intangibles that amortize over 15 years or less. Higher allocations to Class V equipment and Class VI software, player databases, and technology generate near-term tax shields that improve cash-on-cash returns and payback periods.

From the buyer’s perspective, accelerated depreciation deductions reduce taxable income in crucial early years when they’re integrating your business and may be incurring losses or additional costs. This structure aligns with purchase price accounting under IFRS 3, which many international acquirers must follow. However, this approach triggers more ordinary income recapture for sellers, potentially killing deals when sellers realize their after-tax proceeds are unacceptable. In some states, higher tangible property allocations can trigger sales tax obligations that further increase the buyer’s all-in cost.

Balanced Approach: Finding the Win-Win

Most successful iGaming M&A transactions land somewhere in the middle, with thoughtful allocations that keep both parties’ net present value calculations within acceptable ranges while reducing audit risk. This typically involves meaningful goodwill allocation to provide seller-friendly capital gains treatment, substantial but reasonable Class VI intangible allocations that buyers can defend to their accountants, and equipment valuations based on objective appraisals rather than aggressive estimates.

The balanced approach requires more work upfront. You’ll need granular valuation analysis using accepted methodologies like income, market, and cost approaches. Independent appraisers often become necessary to establish defensible fair market values for major assets. The closing timeline may extend as parties conduct due diligence on asset values and negotiate specific line items. Yet these investments pay dividends through reduced audit risk, smoother integration, and deals that actually close rather than falling apart over allocation disputes.

In the current market environment, where iGaming M&A activity continues to accelerate, buyers and sellers who demonstrate flexibility and sophistication in allocation negotiations tend to close deals faster and preserve more value than those who take hardline positions.

Current Market Trends in iGaming M&A Activity

The iGaming industry is experiencing remarkable momentum heading into 2025, with several forces converging to drive merger and acquisition activity to new heights. Understanding these trends helps you position your business optimally and time your exit strategically.

Market Growth and Valuation Multiples

Recent industry forecasts project the global online gambling market reaching $127.3 billion by 2027, with the iGaming sector specifically expected to exceed $150 billion by 2029. This represents a compound annual growth rate consistently above 6%, far outpacing many traditional industries. Mobile gaming now accounts for over 70% of all iGaming activity, and this shift toward mobile-first experiences continues to reshape how buyers evaluate assets.

Blockchain gaming represented approximately 40% of total iGaming investment deals in 2024, signaling strong investor appetite for cryptocurrency-enabled platforms and provably fair gaming solutions. This trend is expected to continue, with operators who have successfully integrated crypto payment options and blockchain technology commanding premium valuations.

Strategic Partnerships and Consolidation

Mergers and acquisitions remain a dominant business development strategy in the iGaming sector. Companies are pursuing acquisitions to enter new geographic markets, acquire proprietary technologies and IP, access new player demographics, and achieve economies of scale in increasingly competitive environments. The industry has seen significant consolidation among platform providers, game studios, and affiliate networks as larger operators build comprehensive ecosystems.

Geographic expansion is particularly active, with South African and Latin American markets attracting substantial attention. South Africa’s iGaming sector alone is projected to reach approximately €65 million by 2028, making it an attractive target for M&A activity. Meanwhile, North American operators continue acquiring digital assets to strengthen their positions as more states legalize online sports betting and casino gaming.

Regulatory Evolution and Market Access

The regulatory landscape continues evolving rapidly, creating both opportunities and challenges for iGaming M&A. States like California, Georgia, Minnesota, South Carolina, and Texas are expected to consider legalizing online sports betting and iGaming in 2025, potentially opening massive new markets. Each regulatory change creates acquisition opportunities as established operators seek to enter newly legal jurisdictions quickly through strategic purchases of locally licensed or well-positioned competitors.

However, regulation also complicates transactions. Requirements for license transfers, gaming authority approvals, and compliance demonstrations can add 6-12 months to transaction timelines in some jurisdictions. Buyers increasingly conduct thorough regulatory due diligence, examining your compliance history, licensing status across all operating jurisdictions, and potential exposure to regulatory changes. Clean regulatory records and multiple licenses command premium valuations in today’s market.

Technology and AI Integration

According to recent surveys, iGaming industry stakeholders rate the importance of artificial intelligence and machine learning at 8.2 out of 10. AI capabilities—particularly for personalization, problem gambling detection, fraud prevention, and automated customer service—have become key value drivers in acquisitions. Buyers are willing to pay premiums for platforms with sophisticated AI implementation, proven player analytics capabilities, and technology infrastructure that can scale across markets.

Cybersecurity has also emerged as a critical evaluation factor. With 36% of cybersecurity professionals ranking AI-powered attacks as a top threat, buyers scrutinize your security posture, data protection measures, and incident response capabilities during due diligence. Investing in robust security infrastructure and obtaining relevant certifications can significantly enhance your exit valuation.

Earn-Outs and Contingent Consideration

The current market features extensive use of earn-out provisions and contingent payments in iGaming M&A deals. Buyers uncertain about regulatory changes, player retention, or revenue sustainability often structure transactions with significant earn-out components tied to post-closing performance metrics. From a tax perspective, earn-outs create additional complexity: contingent consideration is added to the purchase price when it becomes “fixed and determinable,” requiring both parties to file supplemental Form 8594 in the year earn-out payments crystallize.

Your initial purchase price allocation should account for potential earn-outs, establishing how additional payments will be allocated across asset classes. Some agreements specify that earn-outs allocate proportionally to the initial allocation, while others tie earn-outs specifically to goodwill or other classes based on the metrics that trigger payment.

Frequently Asked Questions

Is Form 8594 required for stock deals?

Technically, Section 1060 applies specifically to asset acquisitions, so pure stock sales don’t require Form 8594 filing. However, if your stock transaction includes side agreements—such as personal consulting arrangements, non-compete covenants, or separate intellectual property transfers—those components may require allocation and reporting on Form 8594. Many seemingly simple stock deals involve these ancillary elements, so consult with your tax advisor to determine your filing obligations.

Can we change the allocation after filing our returns?

You can only modify a filed purchase price allocation by filing amended tax returns for both parties, which becomes exponentially more complicated once business integration is underway. Amended returns invite scrutiny, increase professional fees, and may delay your ability to access transaction proceeds or claim expected deductions. The time to get your allocation right is before filing, not after. Lock down accuracy before anyone hits the submit button on their tax returns.

How do earn-out payments affect purchase price allocation?

Contingent consideration creates an ongoing allocation obligation. When structured as true earn-outs rather than employment compensation, these payments are added to your original purchase price when they become fixed and determinable—typically when the conditions are met and payment is certain. Both buyer and seller must file supplemental Form 8594 for the tax year when the earn-out crystallizes, allocating the additional consideration across asset classes consistent with your original methodology. Your purchase agreement should address this scenario explicitly, specifying whether earn-outs allocate proportionally, to specific asset classes, or according to some other formula.

What if the buyer is a non-U.S. entity?

U.S. asset transfers trigger Form 8594 filing requirements regardless of the buyer’s domicile. However, foreign buyers may have no U.S. tax return filing obligation beyond Form 8594 itself if they aren’t otherwise engaged in a U.S. trade or business. This can create practical complications: the buyer may be less motivated to cooperate on allocation schedules if they face minimal U.S. tax consequences, while you as a U.S. seller face significant tax implications. International transactions require coordination with tax counsel experienced in cross-border M&A to navigate these issues effectively. Some transactions use escrow or other mechanisms to ensure foreign buyers follow through on their Form 8594 obligations.

What valuation methodologies are acceptable for intangible assets in iGaming transactions?

The IRS recognizes three primary valuation approaches: cost, market, and income methods. For iGaming businesses, income-based approaches dominate because intangible assets like player databases and proprietary software generate identifiable future cash flows. Discounted cash flow analysis of player lifetime value, adjusted for attrition rates, typically supports player database valuations. Relief-from-royalty methodology often underpins brand valuations, calculating the value of owning rather than licensing your brand name. Technology assets may use cost-to-recreate approaches when market comparables are unavailable, though income methods generally provide more reliable results for established platforms with proven revenue generation.

Should we hire an independent appraiser for our iGaming M&A transaction?

For transactions exceeding €5-10 million, independent valuation specialists typically justify their cost multiple times over. Professional appraisers provide defensible fair market value opinions that withstand IRS scrutiny, offer objective benchmarks during buyer negotiations, satisfy IFRS 3 and ASC 805 accounting requirements for purchase price allocation reporting, and reduce audit risk by demonstrating good faith efforts to establish appropriate valuations. The investment in professional valuation services often ranges from €15,000 to €75,000+ depending on business complexity, but this expense frequently pays for itself by optimizing your tax position and supporting higher valuations during negotiations.

Final Thoughts: Making Purchase Price Allocation Work for Your iGaming Exit

Purchase price allocation isn’t merely a technical tax exercise to be delegated to accountants after your deal closes. It’s a strategic, value-shifting lever that deserves attention from day one of your M&A process. The difference between a thoughtfully structured allocation and a hastily assembled schedule can easily represent 10-20% of your net proceeds—hundreds of thousands or millions of euros left on the table through preventable tax inefficiency.

The iGaming industry’s unique characteristics—valuable intellectual property, player relationship data, multijurisdictional operations, and rapidly evolving technology—make allocation negotiations particularly complex. Your betting platform code, player analytics systems, and established brand represent substantial value that must be carefully identified, valued, and allocated to optimize both tax treatment and accounting outcomes.

Smart sellers engage experienced iGaming business brokers and tax advisors early in the exit planning process, often 12-18 months before targeting a transaction. This timeframe allows you to structure your business optimally, address potential valuation issues, gather supporting documentation for intangible assets, and model various transaction structures to understand their tax implications. You can identify and remedy regulatory compliance issues that might depress valuations, strengthen your technology IP and documentation, and develop credible financial projections that support premium goodwill allocations.

As M&A activity in the iGaming sector continues accelerating through 2025 and beyond, with the global market racing toward $150 billion and regulatory environments evolving worldwide, getting purchase price allocation right becomes increasingly critical. The buyers entering this space are sophisticated, often backed by private equity or strategic acquirers with extensive M&A experience. Meeting them with equally sophisticated tax and deal structure planning ensures you capture maximum value from your years building your iGaming business.

Ready to Plan Your iGaming Exit Strategy?

Whether you’re actively marketing your online casino, sports betting platform, or affiliate network, or simply beginning to contemplate an eventual exit, now is the time to address purchase price allocation strategically. Schedule consultations with experienced M&A advisors who understand the iGaming industry’s unique challenges and opportunities. Model different transaction scenarios to understand their after-tax implications. Document your intangible assets comprehensively so buyers appreciate their full value. Most importantly, remember that the headline price in your press release matters far less than the check you actually deposit after taxes, fees, and expenses.

With proper planning, sophisticated allocation strategies, and expert guidance from professionals who understand both iGaming operations and M&A tax dynamics, you can structure a transaction that delivers optimal after-tax proceeds while providing your buyer with the tax efficiency they need to justify a premium valuation. That’s the definition of a successful deal—one where both parties walk away satisfied that they’ve captured value and positioned themselves for future success.

The next IRS envelope you receive shouldn’t contain surprises. It should confirm that you’ve executed a brilliantly structured exit that captured every dollar of value you worked so hard to build.