State tax credits can be sold in some states.

The IRS addressed the tax consequences of such a sale in a chief counsel advice or memo by the national office to the IRS field office in Boston.

It said that anyone selling a state tax credit must usually report the sales proceeds as a capital gain. Since the seller has a zero basis in the tax credit, the entire amount received is gain. The purchaser takes a basis in the tax credit equal to what it paid for the credit. When the purchaser uses the tax credit, it has a gain or loss, depending on whether its basis is more or less than the taxes it uses the credit to offset. For example, if it paid $40 for a $50 tax credit, then it has a gain of $10 when it uses the credit to offset $50 in state taxes. It also has a deduction for $50 in state taxes that it will be treated as having paid.

The memo is Chief Counsel Advice 201147024.