Question

Help, sold my domain name after 15 years, how do I file?

Forum|Forum|3 years ago
March 8, 2023
3 replies
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Ive had a website I made profit from for 15 years. It started to decline over the last 6 or 7 years and I was losing a bit of money on it with server costs and putting in my own time. I got an offer for 30k from someone who wanted the domain name.

So I sold.

Im not sure if this is a capital gain or not. I get that I need to pay some taxes on it but dont think its fair I should pay as if Im flipping domains OR that Ive only paid maybe a total of $800 for the cost of the domain over 15 years and sold for 30k

Its not like I made a profit of $29,200 from the $800 I paid because so much more took place over 15 years and it was a business

Was told fill out form 4797 but I think thats just for property.

I file as sole proprietor....

Any ideas how I go about this?

Not A Product Question

R

RobertB4444

Assets sold by a company are sold as long term capital gain assets. Unfortunately, you were correct about the placement. Virtual assets receive the same treatment as physical assets on your tax return.

On the upside, the tax rate on a long term asset is only 10% so your tax bill is relatively small. On the downside, you will pay tax on the entire $29,200 that the IRS views as profit on the sale of your domain.

Domain flippers do pay a much higher tax rate, though.

@EricDraven

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S

skydealer

I was told by a tax attorney that domain names are considered an intangible asset. When I sold my main domain name I paid a much lower tax rate because if this.

https://www.thetaxadviser.com/newsletters/2016/may/how-internet-domain-names-are-taxed.html also does into detail on this.

"CCA 201543014 addresses three issues regarding the acquisition cost of domain names. The first issue is whether the cost the taxpayer incurred to acquire a generic or nongeneric domain name from a secondary market and then used in the taxpayer’s trade or business is currently deductible under Sec. 162 or must be capitalized as an intangible asset under Sec. 263. The IRS concluded that the costs must be capitalized because the cost of the domain names will provide a future benefit to the user, regardless of whether the domain name is generic or nongeneric. Therefore, the cost of the domain name should be capitalized under Sec. 263. Sec. 263(a) provides that “no deduction shall be allowed for—any amount paid out for new buildings or for permanent improvements or betterments made to increase the value of any property or estate, … [or] any amount expended in restoring property or in making good the exhaustion thereof for which an allowance is or has been made.”

Additionally, Regs. Sec. 1.263(a)-4(b)(1)(i) requires a taxpayer to capitalize any amount paid to acquire an intangible, and Regs. Sec. 1.263(a)-4(c)(1) also provides a taxpayer must capitalize amounts paid to another party to acquire any intangible asset from that party in a purchase or similar transaction. Clearly, the IRS takes the position that a domain name is an intangible asset in which the costs must be capitalized under Sec. 263 and not deducted currently under Sec. 162."

Rick19744

I think a few more comments are needed here to help you understand what's going on and clarify a previous comment:

As you mentioned, you had a business (sole proprietorship) and reported this activity each year; whether that was income or a loss you received the economic benefit each year.
If you purchased the domain originally, have you been amortizing the purchase price?
- If so, do you know what your basis is in the domain name asset?
- You note "only paid a total of $800 over time". Not sure what this means.
- Understanding this is key as there could be some ordinary component to your gain.
You gain on the sale is your selling price (SP) minus your basis in the domain name
This is generally capital gain, except for any recapture of amortization of the purchase price of the domain name; this component will be taxed at ordinary income tax rates.
The remaining gain is capital gain and the capital gain tax rate is either 0,15% or 20% depending on your specific taxable income level. One of the comments indicated 10% which is not correct.
In conclusion, you do have a gain on the sale as your past yearly business activity has no bearing on the sale of the domain name. As noted, this activity was taken into account each year you filed a tax return and received the economic benefit in that respective year.

*A reminder that posts in a forum such as this do not constitute tax advice.Also keep in mind the date of replies, as tax law changes.

E

EricDravenAuthor

@Rick19744

the $800 was a rough figure. Probably less. when I bought the domain name 15 years ago, I had to pay godaddy for each year I own it. If I only had it less for a year then it would be considered a flip I guess and would be taxed as a short term capital gain.

Ive had a website on that domain for 15 years and had passive membership income. Each tax year I write off, cost for running it, servers its hosted on, software etc etc etc. the last few years I have made less than what Im spending on it

I just wanted to make sure it wasnt taxed as some domain i just bought for a total of $800 to flip it for 30k. It had a website connected to it that I used as my biz for 15 years

So I just sold the domain name and moved the site to a different url.

I followed the instructions given here in my turbo tax and it seems to be fine. I think, lol

Rick19744

Based on your replies, you have deducted all expenses each year you were in business.

As a result, you will pay capital gain tax on the entire $30,000.

As noted previously, the rate will depend on your income level but TT should handle this correctly.

*A reminder that posts in a forum such as this do not constitute tax advice.Also keep in mind the date of replies, as tax law changes.

C

Chrissan1999

Hello!

I’m in the same situation as this person except I never wrote off the cost of the domain name over the years. I bought it years ago and kept the domain name and paid hosting fees on it but never wrote them off. I’m a sole proprietor and do a Instacart and consulting business. Since I never wrote off the costs of this domain and now I’m selling it how should I handle the tax reporting this year?

KrisD15

Report the adjusted basis and selling proceeds for the sale of the domain.

The adjusted basis will be your cost, less depreciation, plus any improvement costs added.

If you never reported the yearly expenses, you can amend your prior three year returns.

As a cash method Taxpayer, yearly business expenses need to be reported and taken the year they were incurred and paid.

If you never took depreciation you could "adopt a change in accounting method".

The IRS is very clear and strict when it comes to Depreciation and Depletion.

Taxpayers do NOT have an option of bypassing depreciation when selling an asset. The depreciation "CLAIMED OR THAT COULD HAVE BEEN CLAIMED" must be recaptured.

Please click on this link to learn more on your options.

@Chrissan1999

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