Domain Name Sale

What is the name of your state? California

Hi,

I recently sold an internet domain name for a large sum (over $100,000). I bought this domain name ten years ago and it has slowly increased in market value at an incalcuable rate until now. My question is - Is the price I was paid for the domain name considered income? It was the sale of an asset that already carried that value. I'm not sure how to declare the sale, or if there's even a way that I can without taking a bath in taxes.

Thanks in advance for any advice...

Of course you must pay taxes on it (difference between what you sold it for and what it cost you).

The first issue is whether it is a capital asset or not. It would depend on the nature of how/why you obtained the domain, but most likely I would suspect that it would.

If it is a capital gain, then the profit is a capital gain. If you have held this asset for more than a year you owe 15% federal tax.

Otherwise it's going to be treated as ordinary income.

If you have a state income tax, usually they don't make a distinction. The profit is taxable as ordinary income.

Actually, the first question is whether the domain name is inventory. Are you in the business of buying up lots of domain names & selling them for more $$? (Inventory.) Did you just buy a few names because you thought they'd go up in value & you could cash out? (Investment.) Did you have a business that used that domain name & you sold the business asset? (Section 1231 gain.) Did you start up a web page on a topic that interested you & now you're selling the domain name? (Hobby.)

If the domain name is business inventory, you have to declare the sale on Schedule C & pay income & self employment taxes on it.

If the domain name is an investment or a business asset, it will be taxed as long term capital gain. You'll either report the sale directly on Schdeule D (investment) or on Form 4797 (sale of business asset), which carries to Schedule D. I'm not sure how the sale would be taxed if the domain name was a hobby. I suspect the sale would be reported on Schedule D, but I'd research it if you were my client.