So is there a consensus that if you buy and sell domains (and park them in the interim), they should be treated as capital gains/loses. If you hold them for less than a year, then the gains/losses will be treated as ordinary income. If you hold them for more than a year, then the gains/losses will receive long term capital treatment, which will tax them at the lower capital gain rate.
Then, there is a treshold issue as to whether a person buys/sells so many domains in a given year that it could be classified as a trading activity. In this case, all the gains/losses are treated as ordinary (and not capital in nature).
Is this understanding correct? Thanks everyone.
Not really. You might be obfuscating the issue. In skeletal form, you do this do avoid capital gains:
1. Set up an offshore company or trust, e.g. BVI.
2. Buy your domains from that entity, or sell them NOW at par (what you paid for them) to that entitiy in anticipation of a capital gain.
3. Lease them back to you in your tax jurisdiction.
4. Pay *fair market* lease/rent for your domain earnings; i.e. if this offshore entity leases you a domain for $1000/month and you make $600/month from it, then have the offshore invoice you a sensible fee.
5. When you sell the domain(s), have the offshore take the profit and don't repatriate it. The offshore won't be paying capital gains.
If you make obvious abuse, you will get into trouble. Bear in mind that whatever you pay in rental fees to your offshore, the offshore still accumulates that as non-taxable profits.
To sum up:
a) Satisfy your domicile tax authority that you are dealing 'at arm's length'. Declare the income you make.
b) Don't repatriate profits -- buy an overseas property.
c) Never try the 'cash machine stunt'. They can find you that way.
