IRS sent me a bill, trying to tax me for income from a domain sale.

[Soofi]

ok so lets say you had bought 10 domain names in a package deal of $5000.. which makes it a $500 per domain name.. so as per my calculation on these figures you would owe them a tax payable on $2000 (profit), however you still have some domain names remaining where you can show expenses incurred on the one sold already and remianing to save some.

That's just how I go about my taxes here in India !!

 

[DigiNames]

ok so lets say you had bought 10 domain names in a package deal of $5000.. which makes it a $500 per domain name.. so as per my calculation on these figures you would owe them a tax payable on $2000 (profit)

As we all know here an DNForum, domains are not all valued the same. I liked all the names I purchased, but the package had names from OK quality to some very very good. To just average the expense across all names hardly seems fair to me. And again, I spend 5000 and made 2500, so why should have I have to pay taxes on it at all?

The $400 isn't a big deal, and if they don't except my explanation I will just pay it and chock it up to experience. It is definitely something to think about though, especially with transactions even larger than than this one.

Several people have made a point that is well taken, and I guess if I am spending or making thousands of dollars at domaining I should probably treat it more as a business.

 

[INFORG]

There are a couple schools of thought on how to classify domain expenses. One is that you treat them like inventory and each is assigned a value, and your profit/loss is based on those individual valuations.

The second one (the one I ascribe to) is that you don't truly "own" a domain name. You pay money in acquisition fees, and registration fees, but you are only really maintaining rights to use the domain.

In the first scenario, you have to account for inventory and you might end up paying taxes on a single sale, business asset taxes, etc.. In the second, you have a $5000 expense, and only $2500 in earnings. For most purposes, I think the second one is the way to go - unless you are raising capital or establishing a business value for potential sale, then you may want to treat as inventory.

 

[DC20]

First, I'm not a tax guy and not giving legal advice...this is my opinion.

How do you pay your taxes? As a person or sole proprietor? Even without a business license, as I understand it, someone dabbling in let's say EBay would have to pay tax on the money taken in, but could first subtract the cost. So for your batch of domains, you "should" have put down the $5,000 as a business expense and the $2,500 as income...if that was the only thing you had to declare, you are -$2,500 that year and it would actually help your tax position.

However, this is much easier to argue with a DBA. So, if you don't have one, go get one. If you just dabble and it's not your main source of income, it the easiest option and only costs <$100 everywhere I know of.

And if you didn't declare it then, I'd probably pay it and take it as educational expenses for the next domains/sales.

My $0.02 ...Good luck

 

[Soofi]

As we all know here an DNForum, domains are not all valued the same. I liked all the names I purchased, but the package had names from OK quality to some very very good. To just average the expense across all names hardly seems fair to me. And again, I spend 5000 and made 2500, so why should have I have to pay taxes on it at all?

Totally understandable that all domain names are not valued at the same price, however I don't know if IRS personnel will be able to understand domainers perspective and either you will have to furnish a proof of purchase (bill) stating each domain's price on it or will have to calculate on an average basis as I stated above IMO..

In any case, please do not hesitate or waste anymore time to get to nearest IRS office and request answers to all these questions.

And keep us posted, good luck!

 

[lawline]

The 1099 for "non-employee" compensation is correct.
You need to allocate the $5,000 original cost to the various domains using a reasonable method such as appraised values.
For example, assume the domain has an allocated cost basis of $1,000, then your net gain is $1,500 ($2,500 revenues, less $1,000 cost).
You only pay tax on the $1,500 profit.
You report the gain on Schedule D as a short term gain or long term gain.

On the other hand, if you are a dealer or in the trade or business of buying and selling domain names, you should report all of the income and expenses on a Schedule C. This has the additional advantage of being able to deduct business related doman name expenses such as listing fees, commissions, advertising, publications, etc.

 

[charlescarreon]

Total agreement with the last two poster. If you do business through a corporate identity or LLC, then no one has to report any of their payments to your company. You integrate all of your income into your total cost of doing business, and get the right tax treatment. Totally lawful, and easier.

 

[tedsudol]

I think every domainer has some names which haven't proven out and he's let them expire as worthless rather than reregistering them. Can a domainer claim domains he has let expire a business loss to help offset any income made through any sales. I would think that would be true - a domain can be looked at as a business investment and any that expire worthless I would think could be considered a business loss. Thanks for your help.

Ted

 

[Soofi]

I think every domainer has some names which haven't proven out and he's let them expire as worthless rather than reregistering them. Can a domainer claim domains he has let expire a business loss to help offset any income made through any sales. I would think that would be true - a domain can be looked at as a business investment and any that expire worthless I would think could be considered a business loss. Thanks for your help.

Ted

I soo do think that can be done. All you would need to do is, furnish registration cost + a paper document or bill saying the following domain was let go (expired) by you and then documented in the books as a loss.. no?

 

[Theo]

Correct. Registration or acquisition costs are expensed at the time of a sale or an expiration, not at the time of the purchase.

 

[DigiNames]

As an update to the original post, I did send the IRS a letter explaining that the amount on the 1099 was not my actual income because of the original expense of the name (including supporting documentation), and they agreed to dismiss the additional taxes. I have a feeling if it was a larger amount of money it wouldn't have been so easy, but I think the amount we are talking about wasn't really worth their time.

Thanks to all those that posted advice.

 

[JohnNapoletano]

If you are not making a lot of money there is no need to incorporate or hire a CPA in my opinion. Read the IRS.gov instructions for Schedule C. If you can handle that you're ok. If not go down to H&R Block and spend $100 for them to file and you get audit protection too. If you are Unincorporated you are a Sole Proprietor and you don't need a town or state business filing to tell you that, you just are according to the IRS. Where it get's tricky is if buying and selling is your business. If that's the case then you have income and expense vs. long term gains (lower tax rate) for sales. Sounds like domaining is your business so you have income and expense. There are more forms than just Schedule C but start here to get your thoughts going.
http://www.irs.gov/pub/irs-pdf/f1040sc.pdf
http://www.irs.gov/pub/irs-pdf/i1040sc.pdf