|Capital gains - do domain sale profits fall under these US laws?|
tax taxes taxation
If one should be so fortunate as to sell a domain name at a profit, would said profit be reported as "capital gains?"
Please, no "guesswork" -- I'd be willing to pay for "professional" advice; I'd probably need other services in connection with expected transactions.
P.S. US (IRS) jurisdiction.
Welcome to WebmasterWorld [webmasterworld.com], lemonyelow1!
|Please, no "guesswork"... |
From the charter for this forum:
Trademarks and Legal Advice
There is only one place to go for legal advice - your own lawyer. While members may point out the possibility of legal issues or discuss recent court rulings, etc, no legal advice should be requested or given on this forum.
Still, someone will probably be able to provide some information about their experience.
Sorry that my first post violated a pretty sensible "no-no."
So, let me amend it to -- although, as you pointed out, I *MAY* be fortunate in getting some [understandably, not-necessarily-bulletproof] responses to the query as originally written --
Has anybody had a good experience with an attorney and/or tax advisor in connection with domain name sales?
I'm not at all sure how not-quite-public communications work, so if you'd respond except for fear of "privacy" violations, let me know how to proceed. THANKS!
Fairly certain domain names don't play nicely with the IRS definition of capital gains. For example, you never really own domains. (If you did you could stop paying those darned renewal fees.)
When that lucky day arrives you'll have to check with your own accountant. Until I'm otherwise advised I'll have to stick with my accountant's opinion: it's ordinary income.
I suspect there's even an IRS opinion about domains if you search deep enough.
Alas, yours is the "25-cent answer" (no insult meant) -- and it MAY be basically right.... My reason for writing further at this point is that I honestly (beyond wishful thinking on my part) think that the correct (defensible) answer may be CAP. GAINS!
I *have* done some research, but am a top 1% layperson, not an accountant or a lawyer. Among the top 10 numbered IRS forms comes 4797. There, one reports things like these: [what follows comes from irs.gov]
"Sales or exchanges of real property or depreciable personal property. This property must be used in a trade or business and held longer than 1 year. Generally, property held for the production of rents or royalties is considered to be used in a trade or business.
Sales or exchanges of leaseholds. The leasehold must be used in a trade or business and held longer than 1 year."
It needs to be checked, but I'll guess that "leasehold" in plainer English is "something leased." [Do I need to underscore... "not owned!?"]
A leased building is, obviously, a very different entity than a $10/year website, but I hope someone with more knowledge than I have will confirm or deny that they have ENOUGH in common to make my line of reasoning either compelling or "arguable."
My hoped-for gains are not likely to be staggering, but even $50,000, say, given the current tax law's much-more-favorable treatment of Cap. gains than ordinary income might make some legal and/or accounting expenses "good business."
Again, if you care to recommend a "specialist" accountant or attorney, I'm all ears!
Track down Monte from Moniker. I think he goes by MonikerMan here. He's done enough business and might have the clarion answer, which if untested with the IRS, is not necessarily the right one. (Until you get a letter opinion or a revenue ruling or even a decision by a USDC or USCA or even The Supremes, you can't say for certain.)
Many thanks.... I never heard "clarion" used that way -- my respect for this forum & this (YOU) correspondent has doubled from an already respectable level! (Just heard a local politician, Martin Markowitz, on TV; must be a red-letter-M-day!)
Best accountant I ever had described tax laws as always grey, never black and white. The question, according to him, always was how dark do you want your grey?
Your example of a leased building appears pertinant on the surface. I think to establish that the income should fall under capital gains you will need to establish a basis. Is that $15 a year the basis? How about if you buy an existing domain for $15k and sell it for $40k - a profit- or, for $100 - a loss? Is the $15k your basis?
Not offering advice here - only sharing an experience, but my tax preparer/advisor had me go under capital gains on a domain sale a couple of years ago.
I've been querying Google about this subject and I have yet to find anything definitive.
Here's some conundrums.
I buy Domain.com in the aftermarket for $25,000. and accidently allow it to lapse. The cost of avoiding the lapse was $9.00 - the renewal fee. Have I suffered a $25,000 loss that can be set off again gains or income?
I buy Domain.com for $25,000. In theory, my tax basis would be $25,000. The domain expires in 1 year when I buy it. What is the period for depreciation?
I renew the same domain for 100 years. What, then is the depreciation schedule?
I buy Domain.com for $25,000 and forget to renew it. It lapses after 1 year but I am fortunate enough to recover it by using a drop service for which I pay $60.00. Is my basis now $60.00? Suppose someone else picks up the drop/snap and I buy it from him for $2,000. What is my basis? Did I suffer a loss of $23,000?
I buy Domain.com for $25,000 and sell it for $50,000 8 months later. I guess then the increase is treated as ordinary income?
I buy Domain.com for $25,000 and sell it for $5,000. What's the tax treatment?
Is the basis whatever I pay for the domain or is it the fair market value of the domain? I buy Domain.com (maybe worth $5,000 FMV) from my friend Bob for a contract sales price of $1,000,000, payble in annual installments of $10,000. I allow it to lapse after 1 year. What's the tax consequences to my company and to Bob?
I buy Domain.com for $25,000. I die. As part of wrapping up the estate my heirs secure appraisals of assets to determine tax liability. The domain appraises for $5,000. Tax consequences?
Food for thought. I have been unable to find an opinion of a tax court, a letter ruling or opinion of a US District Court on the subject of tax treatment of domain sales, domain depreciation, etc.
Keep in mind that each country may vary in its tax treatment. (So, if you sense death is knocking at your door, do you transfer your domains to your cousin Bubba in tax friendly Elbonia?)
IF anybody can pull up an official government report or publication, or a written opinion of a judicial or administrative body that reviews issues of tax treatment of domain transactions it would be of some value.
Any search sleuths out there?
|So, if you sense death is knocking at your door, do you transfer your domains to your cousin Bubba in tax friendly Elbonia? |
No, I have developed a very trusting relationship with a chap in Nigeria that has promised to shelter all of my assets until my family can take possession :o
Response to webwork:
Most of your questions ARE answered by a careful reading of the IRS instructions (if you're U.S.) that accompany Form 4797.
However, the crucial question of capital gains or not is, as this whole thread signifies, not "settled" in the sense that one can cite U.S. vs. Joe Domain Dealer or anything comparable.
Perhaps the most interesting "link" I found in this connection is this:
ODDLY -- VERY MCUH SO! -- YOU! were the next-to-the-last poster on that (2000) thread, but the last one is the one worth reading, even if -- surprise! -- it prompted a couple of questions on my part, even as it purports to answer other related ones.
Unless "lightning strikes," it looks like I'll have to incur some serious professional services expense -- heck, lawyers & accountants gotta make a living, too!
I realise your question is about US tax laws, but the UK tax treatment might be interesting. The position according to the UK Inland Revenue is:
"What is the tax treatment of selling domain names?
Normally, when a business or an individual sells a domain name, any gain on disposal would be taxed under the capital gains rules as a gain on the disposal of an asset. Where a business or individual trades in domain names for profit, the domain names would form trading stock, and sale proceeds would be treated as trading income for tax purposes."
So, bit like real estate. Buying and selling infrequently it's a capital gain. Making a business of it with numerous transactions, it becomes income. The US capital gains laws are probably utterly different, of course.
Brilliant! ... Or should I say "smashing?!" [I admit that I don't even know what a hip (young) American would say.]
Seriously, thanks for your input.... I recognize that it's not "binding" -- furthest thing from it, but it all but annihilates the initial "you don't own it like shares of a company, so how could you possibly realize capital gains by selling it" reaction my query elicited. (Again, he could be "right for the wrong reason," of course.)
|if you sense death is knocking at your door |
Even if you're the picture of good health, remember that (*&^ happens. Make sure that your important domains are renewed well into the future so they don't lapse while your executors are figuring out what to do.
In UK - also check the difference between buying or selling a website as opposed to a domain. This has very different final outcomes for businesses - not sure about personal though.
I have always been advised to buy a website as an on-going business, rather than a domain that happens to have a few pages attached.
Trading stock vs. trading stock.
Chattels/goods that you keep in inventory, sell and replenish, i.e. "your stock in trade", the origin of the famous "a lawyer's time is his stock in trade".
Equities, shares of a company, that you can buy and sell, that are subject to capital gains tax if held for more than 12 months (?) and are treated as ordinary income if profits are made by selling before holding for more than 12 months.
Hypo 1: I hold 3000 domains, intending the vast majority for development. From time to time I sell a few to fund further development. Query: Are the domains my stock in trade or are they like undeveloped lots in a housing development that sometimes I sell to 3d party developers?
Hypo 2: I partially develop domains before selling them. Capital gain or ordinary income?
Hypo 3: My business has been predominantly that of domain reseller, but most domains are held for more than 1 year.
Hypo 4 - 10: Creative corporate ownership models, where business A buys domains strictly as a domain holding company then business B leases the domains from A and in turn sells certain rights to 3d parties (you get the picture).
In the absence of a definitive answer I would suggest you think your business model through, since the actual model may effect your 'final answer': Do you develop domains? Was the domain you sold an income producer? Etc..
A pat answer by an accountant will no protect you from personal liability, though it may give you someone to sue for your added losses for bad advice (but you may not win that judgment since 'the answer' wasn't a negligent one, merely one that wasn't actually known in the community).
I tend towards playing very conservatively when it comes to taxes, unlike many others. I prefer, if I'm ever audited, to have cards that I can play against any that the tax collector may attempt to play.
I'm not offering legal advise here, but the leaseholds condition doesn't apply. A domain would not be subject to captial gains because title never passes to you. It is treated the same as leasing a car.
IANAL. However, unless US tax laws have changed since I last checked (and I admit I last check *many* moons ago), sales of intangible property would be a capital gain or loss. A domain name is obviously intangible property. So long as I pay the renewal fees, it is *mine*. I can't imagine any sensible legal argument that if I sell a domain name for profit, it is other than a capital gain.
NOTE: I am assuming here the OP isn't a professional domain name speculator. If so, the tax implications might be different. He mentioned "If one should be so fortunate as to sell a domain name at a profit, would said profit be reported as "capital gains?" A domain name speculator wouldn't see selling a domain name as being merely "fortunate". He would in fact expect such given the business that he is in.
>I'm not offering legal advise here, but the leaseholds condition doesn't apply. A domain would not be subject to captial gains because title never passes to you. It is treated the same as leasing a car.
Again, IANAL. Domain names aren't owned by regsitrars like car leasing firms own their cars. The domain name regsitrar never held the title to the domain names I own. They merely acted as my agent to handle the task of recording my registration with the registries. I have legal title to my domains. So long as I pay the service fees the registry, it is mine until the end of time so long as I do so.
Many thanks.... I'm working "feverishly" to connect with (and no doubt pay handsomely) an attorney or accountant who doesn't have to say IANAL (although, obviously, the latter would say IAAA) -- took me more than a second to crack the code -- thought you were taking me into your confidence more than I'd actually be comfortable with.
There's a $250 book by an expert named David Hardesty available on the web.... Since an hour of prof. time might cost more than that, I'm tempted.
And if you want a REAL treat, test your googling ability to find an apparently real dispute "headlined" Marx Bros. vs. Warner Bros. -- it's not tax-oriented; rather, it's all about "who owned Casablanca." Hilarious!
|Since an hour of prof. time might cost more than that, I'm tempted. |
IANAL: You probably should hire an accountant for your firm...since question answering is part of their job it probably will not cost you anything beyond the standard cost of preparing your taxes.
BTW, I would not be surprised if the way that you handled the initial purchase of the domain affected the resale. If you deducted the purchase price as an expense, you probably can't use the purchase price as the cost basis of the capital investment.
In other words, how to handle the eventual sale of assets is a question others should be asking their accountants.
(NOTE, the NIC fees are fees...not the purchase price)
I'm certainly not a tax expert, but after discussing the matter of domain sales with my CPA last year, we wrote off a domain name sale as capital gains.
It is an investment like any other, no?
Well, I'll let you guys know if I get audited but it made perfect sense to both of us.
yintercept is probably right.. If you bought the domain name from somebody for a relatively large (above 500 dollars) and did not depreciate it like an asset... you probably should not take capital gains.. If you bought the domain name at the registrar, I suspect it does not matter.
This is a great topic.
Just my two cents...
In 2001 I DONATED a domain name I had registered a year earlier to a state run agency (which falls under charitable donations in the tax law) and was allowed to deduct the "fair market value based" based upon an estimate made at the time by one of those online domain selling brokers popular back then. However since it was treated as capital property I had to declare the original cost (including the annual maintenance (renewal fees) and all other costs I could come up with :-) as the basis and had to claim the rest as capital gains and thus it worked out as pretty much a wash. I used Turbotax to do the calculations and just treated it as personal property.
In the past my method has been simply to call the IRS help line (listed on their website) and ask the specific questions. Their people have always gone out of their way to be helpful (I'm guessing they get paid by the call and time or something so make sure you have a lot of time available to chat) and they have all the computerized manuals and experience of answering similar questions. Then if I don't like the answer I go seek professional help :-). Beware though, certain reports claim even the IRS gets the answers wrong a large percent of the time and YOU are still responsible for any of their mistakes or later changing of their mind.
I don't believe you ever own a domain name, only a right to use it.
However, I also don't believe you ever really own stock in a company unless you are the majority shareholder (50%+).
If stock holding can be written off as a capital loss/gain, then I don't see why the same couldn't be argued for domain names.
A domain name is not IMHO "real property", neither is stock in a company for most people.
I can't find an IRS ruling on this subject, and I doubt the IRS want to "get into it" right now.
My very non-legal advice would be to treat it as a capital gain if you so desire, and let someone else prove otherwise!
Domain names are non-tangible assets that can appreciate or depreciate. I've seen a few whacky analogies in this forum (cars!) and they simply don't work the same way. The closest example is Business Good Will. This is the worth of a business excluding all the tangible assets (for a shop tangible assets are stock, fixtures etc).
You will need some professional advise to work out how to put everything together on your form. You see, renewing the Domain name is a cost of maintaining your capital, but these costs can be treated differently in some circumstances. Plus, you could argue that the value of a domain is zero and that the initial registration was a fee that did not add to the capital value - just like the fee of getting a Business name. The work you did since registering the name has added value to the domain name (a classic definition of Capital).
In the end it's more a matter of putting the right numbers in the right slots.
So if it isnt a capital gain and thus isnt capitalized as an asset, would it be considered an expense?
Can I buy a few hundred grand in domains at the end of the year and expense them all?
To the last poster -- I know it's a longish thread, but there ARE some disadvantages to coming in at the end & not reading back....
The question is still VERY much open -- my instincts (supported, FWIW, by the majority of posters here) is that D.N. purchases CAN be capitalized.
However, it's even more likely, in my opinion, that they CAN be expenses.... No contradiction -- the tax code often gives one choices; sometimes, circumstances (like what one does for a living) make some choices either more attractive or.... not actually legal, or at least possibly requiring a defense at some future date.... There are lots of ways of "making income go away" near year-end, of course -- some make better business sense than others, but I *DO* believe that many people could generate deductible expenses by registering DN's.... Caution, it's almost certain that doing that would result in any subsequent profitable sales being treated as ordinary income, so this "tactic" is "income shifting" not sheltering!
Having said all that, I, too, am not a lawyer, and you do well to get professional advice if there's either significant money involved, you HATE hassles or both.
Well yes an no. Remember captial is used to produce good and services (ultimately income). If you have no income against those domain names, they wouldn't be a deduction and even if you used them as a deduction - it is limited to the income they earn.