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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.
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.
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!
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.
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!
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?
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?
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!
"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.
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.)
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.
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.
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.
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.
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)
This is a great topic.
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!
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.
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.