Domain Sales income - tax implicatons?

[basscaster]

I'm in the process of classifying domain sales for my 2003 tax return, and I'm a bit stumped on how to file.

I am interested in learning how members of the forum (and their accountants) are classifying domains, and under what section of the tax code this is filed under. To the best of my knowledge, the IRS has not set up guidelines for domains sold on the secondary market.

Here are a few possible issues to consider, depending on the approach:

1) treating capital gains for sales on domains they have had for over one year
2) treating capital gains for sales on domains they have had less than one year
3) expensing domain reg fees
4) depreciating domain values, if at all
5) expensing costs over reg fees when buying premium domains
6) treating domains as property (per sex.com court ruling this year)
etc.
7) expensing dropped domains

looking forward to replies - 04-15 is closer than we think.

Thanks in advance.

 

[Nodnarb]

I am/have a single-member LLC, which is a pass-thru to my personal income tax.

Since domains are not owned, but rather rented, I classify the registration fees as an expense. I consider any "sales" as income.

A domain name is not inventory. I would advise against any depreciation. A domain name has no real value since it's not property. (See your domain name registration agreement with your registrar to clarify.) It's worth exactly $0-$8.95 (or whatever your annual registration fee is.)

You can't expense a dropped name because you've already expensed the registration fee.

Keep it simple and your life will be easier. Sure, there are probably some fancy accounting methods used by big domain companies, and maybe even some loopholes. But I guarantee you that the first time you get an IRS audit, you'll wish you had just kept it to dollars in/dollars out.

 

[basscaster]

Because of the sex.com case and the court deeming the domain to be property, I am curious if the IRS has taken a position on domain sales. Do you know of any IRS Code/Sec numbers in which the IRS establishes their position? I searched irs.gov and found no useful info.
Thanks.

I am/have a single-member LLC, which is a pass-thru to my personal income tax.

Since domains are not owned, but rather rented, I classify the registration fees as an expense. I consider any "sales" as income.

A domain name is not inventory. I would advise against any depreciation. A domain name has no real value since it's not property. (See your domain name registration agreement with your registrar to clarify.) It's worth exactly $0-$8.95 (or whatever your annual registration fee is.)

You can't expense a dropped name because you've already expensed the registration fee.

Keep it simple and your life will be easier. Sure, there are probably some fancy accounting methods used by big domain companies, and maybe even some loopholes. But I guarantee you that the first time you get an IRS audit, you'll wish you had just kept it to dollars in/dollars out.

 

[JuniperPark]

When you sell a name you are technically selling "rights" to a "lease". Keep it simple.

 

[Nodnarb]

Spent the day doing taxes yesterday. Income & Expenses. Simple math, nothing fancier than a very small home office deduction of less than $80. Keep it simple.

We don't want domain names to become property.

 

[BobBob is verified member.]

I have talked to a couple of accountants about this. One immediately recommended a schedule C. The other recommended a Schedule D, but then after I explained how everything works, he recommended a Schedule C as well.

I keep track of ANY expense related to selling domain names like:

Purhase cost
Renewal Fees
eNom fees when refilling account with credit card
Webhosting
PayPal fees
Escrow Fees
eBay Fees

I keep names as "inventory". At the end of they year, you get a deduction for cost of goods sold as well as any of the above expenses.

I have been doing a Schedule C for this for thre years now and have had no problems.

-Bob

 

[BiggieBiggie is verified member.]

Some good info here!

Wish some certified accountants could respond as well!

 

[Nodnarb]

Schedule C is for Profit/Loss from a Business.
Schedule D is for reporting capital gains and losses.

Like you, I've filed a Schedule C for 3 years and getting ready to submit another one in the next 2 weeks... I don't consider domain names as inventory though.

 

[DNQuest.com]

I am incorporated, so any expense I incur from registrering/renewing domains and any associated fees are expenses. Any sales I have is revenue. The simpler, the better.

 

[diverge]

Tax day is here! Any last minute tips?

I am filing a Schedule C, and am not taking my domain name portfolio as inventory. Nodnarb is right -- the simpler the better. Plus this reduces my overall tax liability, since inventory is taxable.

 

[FMS]

No accountant here, but I would have to agree that domains are not inventory. From an outsiders point of view...once you pay for inventory its yours. However, since we have to renew the names every year it seems that we do not own them like inventory. Once we buy, we have to keep on paying, otherwise we lose them.

 

[Nameable]

Tax day is here! Any last minute tips?

Yeah, file an extension. :cheeky:

 

[TopNames.com]

Everything I do with domains is done under an LLC for tax purposes and I declare every penny. Don't mess with the IRS

 

[Domagon]

Domains are most akin to a fixed asset - more specifically is a transferrable license that one can buy/sell, etc.

I treat income from the sale of domains as a capital gain - some real advantages ... long-term capital gains rate for domains held at least 1 year is only 15% (5% for some filers) verses normal tax rates that for many folks is around 28%; no fica tax, etc either.

There's no one right way to do it as of now...but whatever method one uses, the key is to be consistant. Domain sellers doing large volume should definitely consider having an accountant involved - not just to be sure it's done right, but to save money...there are lots of ways to reduce tax liability that are not obvious.

Ron

 

[Domagon]

Addendum:

For fixed assets, it's often better to have them held by an "S" corporation (not a "C" !!) or even Personally - one assumes more liability, but can save a lot of money in states that have capital stock taxes on corporations.

Not familiar enough with LLCs to know if they're advantageous in regards to holding assets one intends to sell for profit.

Ron

 

[FMS]

To what extent should we be worried about liability? Is that only if you are grabbing previously registered company names or possible trademark initials etc.?

I'm wondering because my accountant told me to specifially keep this business as a "C" proprietorship. The biggest reason being the ability to turn over names without waiting a year. Also, unless I am ready to invest 1 million capital its not worth turning into a corporate.

I already have a corporate and can't imagine going through all that work, down to corporate minutes (oh how fun :-( ) for domain names unless I decide to invest heavily.

Any thoughts?

 

[Domagon]

To what extent should we be worried about liability? Is that only if you are grabbing previously registered company names or possible trademark initials etc.?

For one dealing strictly with domains, liability is a minimal issue. Many domain name sellers, even some big ones, are sole proprietorships - not incorporated.

Folks who run popular websites on the other hand should certainly be concerned about liability - not just lawsuits, etc but also more mundane issues such as spending too much money - having a seperate entity allows one to keep a better track of spending, etc.

I personally have two companys - one that operates websites (C-corp) and another that owns domain names (S-corp).

I'm wondering because my accountant told me to specifially keep this business as a "C" proprietorship. The biggest reason being the ability to turn over names without waiting a year. Also, unless I am ready to invest 1 million capital its not worth turning into a corporate.

Biggest problem with a "C" corporation is double-taxation. Also, corporate tax rates are often higher than one's personal tax rate.

One can buy/sell domains anytime no matter how their business is structured - the difference is at tax time...

There are some obscure entity types/structures that may be better, but of the ones we are dicussing, sole proprietorships are often advantageous given the current low capital gains rates. Next best choice is likely either a "S" corporation or possibly a LLC (don't know enough about LLCs so not sure).

Waiting 1 year whenever possible allows one to book the sale as a long-term capital gain...otherwise it's likely going to be taxed at a much higher rate. This 1 year rule applies regardless of how an entity is structured, though how it's applied will vary.

I already have a corporate and can't imagine going through all that work, down to corporate minutes (oh how fun :-( ) for domain names unless I decide to invest heavily.

A corporation consisting of only one person doesn't necessarily have to worry about all that stuff - there's no one to disagree and no shareholders to answer to other than yourself. With that said, one should certainly keep detailed records of purchases, sales, and other important business that has been conducted - including distributions (dividends) to shareholders (yourself).

Ron

 

[FMS]

Ron,

Thank you so VERY much. That had to be one of the most informative posts I have read thus far.

I vote that we keep this up so that in the future other members can refer to it :cheesy:

 

[sasquatch]

If you incorporate offshore (and you can become one-person inc. or corp. offshore) you will not have to pay one cent on any tax, as long as you keep it strictly to cyberspace related business - meaning no any sales or shippings of actual tangible physical goods from within u.s.

So, as long as you keep everything in "cyberspace" - you're home tax free on any gains.

However, there's an initial cost of about $700-1,000 to form a one person corp., and an annual renewal of about $300-500 (all depending on the offshore location)

 

[Domagon]

If you incorporate offshore (and you can become one-person inc. or corp. offshore) you will not have to pay one cent on any tax, as long as you keep it strictly to cyberspace related business - meaning no any sales or shippings of actual tangible physical goods from within u.s.

So, as long as you keep everything in "cyberspace" - you're home tax free on any gains.

However, there's an initial cost of about $700-1,000 to form a one person corp., and an annual renewal of about $300-500 (all depending on the offshore location)

How does one get the money out of this off-shore corporation?

Distributions, Dividends, Payroll, etc are going to be taxable to U.S. residents regardless of where the company is incorporated.

For any domain speculator doing large volumes, your above approach is a recipe for disaster.

Take a 100K gain on a domain held at least 1 year...

Normal long-term gain rate ... 15% tax ($15,000)

Your suggested way ... 0% tax BUT then say 2 or 3 years later when the IRS does an audit ... expect to pay upto 34% tax plus penalties ... could easily be $30,000 to possibly over $100,000! - more than what the domain sold for to begin with!

Not sure that's a risk most folks want to take ... please, anyone considering do the above, make sure to have a darn good *tax attorney* (note the word "attorney" in there - not accountant) review the corporate structure, including how one gets money out legally - that will likely prove to be the toughest part.

Ron