How To Classify Domain Name Sales For Tax Purposes

Tax season is in full swing, which brings forth the daunting task of taxes. For many domain investors, a common question that arises when filling out tax forms is how to categorize income generated through the selling of a domain name. For example, if you purchased a domain name for $15 dollars a few years ago, and turned around and sold it for $15,000 in 2007, how do you show that on your income taxes? Of course, we recommend that you always discuss tax matters with your accountant, but here are a few things to keep in mind.

• If you buy and sell domains as part of a business, the Internal Revenue Service will look at the money you generate through sales differently than if you just happen to have sold a domain or two last year. If the domain name was a personal asset, the sale can be reported on a Schedule D. If the domain name was a business transaction, the income will most likely need to be reported on a Form 4797.
• Do you consider your domain names to be leased or owned? Believe it or not, this too makes a difference when it comes to taxes, and one could make an argument for either status. Domain owners can claim the annual fee paid out to the registrar is simply a lease payment, while others argue the fee is monetary compensation provided to the registrar for managing the ownership records of the names.
• Will you consider your domain name as a trademark for tax purposes? This will depend on how you utilize your domain name. For example, if your domain name can be considered brand-able, what is the value of that brand and how much of that value can you use as a trademark for tax purposes?
• Lastly, domaining is a relatively new business concept. This means the tax rules surrounding domain buying and selling are relatively grey. A domainer’s best bet when playing the tax game is to use an accountant who at least understands the art of domaining and preferably has experience filing taxes for individuals in the domain business. Additionally, the accountant should be consistent in the way he or she handles the taxes.