Domain Name Sales - Revisted for 2011

Earned Income, Unearned Income or Capital Gains?

[rocker]

I know this is more of a discussion to have with an accountant and any information shared is just opinions. However, I was wondering what is the opinion of fellow domainers on what the latest IRS rules are for the profits from the sales of domain names.

Should they be classified as earned income, unearned income or capital gains?

I am mostly concerned with domain name sales and not websites.

[Webwork]

I suspect the best advice, beyond carefully scrutinizing your business operations/practices/policies/procedures with an accountant, is to practice "consistency".

Example: You buy domains in the aftermarket. You depreciate the cost of acquisition (versus treating as an "expense"). 3 years later you treat the resale as a long term capital gain, subject to recapture of the depreciation. You treat sales made in <1 year as ordinary income (short term capital gains). You report all sales, even the many that do not result in anyone reporting the sale. Even sales involving wire transfers from overseas (or any other form/method of payment.) You "do this" consistently.

You really need to sit down with an accountant and work through this issue in detail IF your year-to-year "domain business" investments, cash flow, expenses, etc. are considerable. I would also suggest you dig into a) the tax code (shudder . . ) and the "revenue rulings", in order to be prepared to fully prepare to defend your practices should anyone ever question them. Conform your practices to the best available information and any rational inferences that may extend from existing law/rulings.

No easy task. Sorry, the days of "easy money online" (:p) are fading into memory.

[rocker]

Webwork thanks for the reply.

I am by no means trying to dodge any tax obligation. I am more than willing to pay my fair share of taxes.

I am more concerned about some domain names that were hand registered 12 years ago and have been parked the entire time. If I sell them is it considered earned income or capital gains?

[Webwork]

Rocker, if you can find a "straight up answer" to your question on the IRS website, in the internal revenue code, in the RR, etc. feel free to report the results back here.

I've looked for that answer, just like I used to look in reported case/judicial-opinion law and statutues for "the answer" to the many variations of legal questions I had in law school and as a young lawyer. I looked, that is, until I learned that many important/consequential legal questions are only answered by logic, inference, factual nuance, good arguments, etc. (Tax questions ARE legal questions.)

I've been doing things consistently for 12 years. At a certain point in time ther are even new arguments that can be made based upon estoppel, laches, etc. - as in "Hey, I've been doing this for years and relying on your "no objection" response to continue acting in this fully disclosed manner."

I gave you the best "answer" I can offer and, trust me, I've looked for best answer - like my life depended on getting it right. In many situations the best you can do is manage risk, not eliminate it. :-/

[rocker]

Webwork, Thanks, I do appreciate your feedback.

Rocker, if you can find a "straight up answer" to your question on the IRS website, in the internal revenue code, in the RR, etc. feel free to report the results back here.

I'm not sure that anything has been written there yet concerning the sale of domain names.

[ThatsBoBo]

Interpret the tax code how all major corporations do: whatever saves you the most money...