When it comes to buying and selling domain names, one issue that many domainers consistently overlook are the tax implications. For the purpose of this article, we would like to focus on domainers domiciled in the United States.
According to the IRS, Internet Domain Names are generally regarded as intangible personal property and the nominal annual domain name registration fees are generally deductible. If a retailer acquires a domain name, then capitalization should also be considered. To clarify further, we can break down the acquisition of domain names in the following scenarios:
- An entity purchases a domain name for the purpose of developing a brand; The monies spent are allocated as an asset that can be depreciated over time.
- An entity purchases a domain name with the purpose selling in the future; The monies spent to purchase the domain name(s) are treated as inventory or cost of goods sold.
- An entity monetizes the domain name; The monies earned from domain monetization are treated as revenue.
Any expenses that are incurred with the process of purchasing or maintaining a domain name offset any revenue or cost of goods sold. Typical expenses include the following:
Registrar fees, Hosting fees, Commissions or fees paid to brokers to buy or sell your domain name, domain development tool costs, or any domain development costs.
Some important tax issues to consider:
- Purchasing and selling domain names as a business or individual; Businesses use Form 4797 while individuals report the sales on Schedule D for capital gains.
- Donating domain names; This strategy must be carefully considered because donations of property that has appreciated falls under very strict IRS guidelines. For example, for noncash gifts with a valued more than $5,000, you will need to acquire a qualified appraisal which must be dated no earlier than 60 days before the donation date and not past the filing date of your tax return.
- Leased or Owned Domain Names;
A couple of professional references for tax guides at a relatively low cost are available online called Domain Name Tax Guide and Domain Tax Guide.
Tough Domains does not promote any tax strategy and before making any important decisions regarding your tax affairs. You should always consult a licensed qualified tax professional that understands the domaining industry and has experience in filing taxes for entities in the domain business.
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