Taxes owed when selling a website

How are taxes handled? Different taxes for domain name versus "content"?

[lfgoal]

I came across a thread here that spoke about selling a domain, but it didn't really answer the questions [webmasterworld.com...] , so I'm hoping someone can shed some light on the subject.

Someone has offered to purchase a website. Are the proceeds from the sale considered as:

1. regular income (that would suck because the taxes would consume at least a third of the sale.

2. capital gains (would still suck but not as bad since the federal capital gains rate is 15% and the state rate, I believe, is 8.25%.

The thing I don't get regarding capital gains tax is this: capital gains are the difference between what you paid for something and what you realized as the sale price. For a website/domain, the acquisition cost is just the domain "rental" fee, which is ten bucks.

Anyone have any ideas on how the IRS treats the sale of a website for tax purposes and how not to get totally hosed?

[edited by: Webwork at 11:52 am (utc) on Sep. 11, 2006]
[edit reason] Charter [webmasterworld.com] [/edit]

[oneguy]

I recently sold one without the content.

In my case, the value was in the name and type in traffic. There was an active website, but it really didn't have much in the way of serps.

I'm planning on number 2, unless my accountant makes a really painful looking grimace.

In the past, I've just called it income. I'm planning to do that differently when the domain is responsible for a significant portion of the value. I'll split it into two parts if I need to.

I haven't even talked to my accountant or any other professional about this... just saying what I plan to do if others on my team can agree.

[LifeinAsia]

You need to sit down with your tax advisor to discuss this. Period. A lot of the answer depends on how you have been treating the income/expenses related to this website up to this point.

capital gains are the difference between what you paid for something and what you realized as the sale price.

Yes and no. Yes, on a baic level, but no because you also factor in any improvements you have made, losses (from damage/theft), and depreciation. In the case of just a domain name that you bought as speculation, then yes the gain would be the difference between the selling price and purchase price. But if it's a functioning web site, then presumably it has content and/or code. If you've paid others for that content/code (and didn't previously write them off as expenses), then that amount would be added to your "basis" (purchase price plus additions), which would be subtracted from the selling price to determine your gain.

[lfgoal]

I'm speaking to an accountant soon. Hoping it will be capital gains.
Lifeinasia, are you saying you think it will be capital gains or not? (btw, I have nothing to add to the basis since 100% of the site was done personally - no content purchased, no links purchased, no advertising purchased for this particular site)

[LifeinAsia]

Without knowing more details, my first guess is that it will be treated as a capital gain. (I'm assuming you're selling it for a gain. ;) ) So please get back to us after you hear from your accountant.

This is one side of taxes that I haven't seen much about. No time right now to do specific reseach about this topic (tax treatment of domains, web sites, etc.), so I'm not sure what the official word on the subject is. If there is one.

As was mentioned in the other thread, taxes are usually a gray area, not often black and white. Which makes it interesting as you can often push the darkness of the gray pretty far. But I tend to like things more black and white, which is why I got out of the business and went back to IT. :)

[jtara]

My accountant recommended treating it as a capital gain.

But yours might not, and it may depend on the specific circumstances.

[lfgoal]

well, it may be a couple weeks before I hear anything. Accountants are busy with deadlines now. But when I do, I will post what they tell me here.