Archived 4-15-03

Tips On Proper Reporting of Your Domain Name Sales on U.S. Personal Tax Returns

By The Masked CPA

With the April 15 deadline for U.S. personal tax returns looming, there are two important issues you must make your tax professional aware of before he or she prepares your return.  They are SEX and treatment. Let�s go over them now to make your tax visit smoother.  If you file something other than U.S. personal returns on income (e.g. LLP or sub S), this article is not for you. 

The first issue to explain to your tax professional is that domain names are service contracts - some mistakenly think them to be tangible personal property. (Try to explain that as she repeatedly flips through her tax guide only to find no specific IRS rules or rulings!) As service contracts, most tax advisors handle domain name sales by applying tax rules related to trademarks!  

A lawsuit involving Sex.com (the SEX I mentioned above to get your attention) could result in a court ruling that domains are considered property.  However, that ruling is far from certain and will be years before final appeals are exhausted.   So, for now, they are service contracts. The good news is that as service contracts, taxes on sales of property (for those states that have such a tax) probably do not apply.

The second issue to resolve is treatment.  That is not whether to treat your hair with henna or cr�me; it is if your transactions are to be treated as if you are an individual in-the-business or not in-the-business.  A number of factors come into play in determining which treatment should be applied.  Those factors include the number of transactions reported, time devoted, intent (e.g. hobby), etc.  There are advantages and disadvantages of either treatment.

If you are treated as an individual in-the-business, in brief, you are entitled to currently deduct ordinary and necessary business expenses, but do not get tax breaks which individuals not in-the-business get, such as capital gain rates - and you may even be subject to additional taxes.  

On the other hand, individuals not in-the-business may be unable to recognize current costs.  There are other significant differences, and your tax professional should make you aware of the beneficial and detrimental consequences of either treatment.  So put some thought and research into it now, rather than make a quick, uninformed decision later. 

Editor's Note: The author is a CPA whose name is withheld because she is unable to respond to E-mail tax questions. This column should not be considered professional advice as your specific situation is unknown. The author urges you to contact your own tax professional to have specific questions answered,

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