Trading domain names - business or investment?

[starlord]

I have a side gig speculating in domain names. This entails:

• Looking for unregistered domains that I think have value
• Valuing domains using various websites
• Registering and renewing the domains, generally for multiple years
• Listing the domains for sale on online brokerages
• Negotiating with buyers
• Transferring domains to the buyer

A couple of questions:

1. Should I consider this a (Schedule C) business, in which the domain names are my inventory? Or are my domain names investments that would generate capital gains/losses rather than business gains/losses?
2. At this point, I've retired from searching for new names for several years. Now I just maintain my existing inventory and very occasionally sell a domain (e.g., maybe one a year). Does this change the situation? (E.g., does this mean I'm no longer an "active" participant in the business?)

 

[quincy]

I hope you are not cybersquatting or typosquatting - purposely registering domain names using the names of well-known companies, or close variations thereof, with the intent to sell these domain names at an inflated price to the well-known companies whose trademarks you used.

The Anticybersquatting Consumer Protection Act (ACPA) was enacted to prevent against this practice. This law allows for a trademark owner to sue in federal court an alleged cybersquatter for transfer of the domain name and, in some cases, for monetary damages.

The above information does not address your tax question, of course, but is a warning to you on selling the domain names you hold.

 

[starlord]

Thank you @quincy - no, I'm not cybersquatting or typosquatting. I trade in domains with inherent resale value.

 

[quincy]

Thank you @quincy - no, I'm not cybersquatting or typosquatting. I trade in domains with inherent resale value.

Okay. I am not seeing how domain names have “inherent” resale value if they do not include famous names but I will take your word for it.

Someone with tax knowledge should be by to help you soon.

 

[Zigner]

Okay. I am not seeing how domain names have “inherent” resale value if they do not include famous names but I will take your word for it.

Someone with tax knowledge should be by to help you soon.

It happens all the time. They just snap up ANY names (it's cheap. Under $20 per year) and wait for someone to come along who wants it. My last name is fairly generic and not "famous" by any means, yet when I wanted to register zignerfamily.com, it points to a site that wants around $5k for it.

 

[quincy]

It happens all the time. They just snap up ANY names (it's cheap. Under $20 per year) and wait for someone to come along who wants it. My last name is fairly generic and not "famous" by any means, yet when I wanted to register zignerfamily.com, it points to a site that wants around $5k for it.

It is the “inherent” value that I question. I accept that some domain names could be attractive to some people but you can generally find the same or similar domain name available with just a different TLD, without a high purchase price from a domain name collector.

As an aside: Democrats surprisingly were able to pick up the domain name “keepamericagreat.com” because no one else thought to purchase it.

 

[PayrollHRGuy]

It is the “inherent” value that I question. I accept that some domain names could be attractive to some people but you can generally find the same or similar domain name available with just a different TLD, without a high purchase price from a domain name collector.

As an aside: Democrats surprisingly were able to pick up the domain name “keepamericagreat.com” because no one else thought to purchase it.

Next to .com every other TLD is second best. My company's domain name was taken when we first started and I got the .net version but check on the .com version and one year it came up and I grabbed it. And redirected it to the .net address. After almost 15 years and never once giving out the .com version most of our traffic still comes in through .com.

 

[quincy]

Next to .com every other TLD is second best. My company's domain name was taken when we first started and I got the .net version but check on the .com version and one year it came up and I grabbed it. And redirected it to the .net address. After almost 15 years and never once giving out the .com version most of our traffic still comes in through .com.

The .com is the preferred TLD for most because it is the most commonly known one (or .org for organizations and .edu for educational institutions) but the fact is that there are several alternatives to paying large sums for a domain name. Slight variations in the name is all that is necessary (as long as the alternative name does not infringe on the trademark rights of another).

 

[reikiman]

As someone who has looked into domain name investing -- I think you could structure the reporting to the IRS either of the two ways you describe.

Yes, the domains you purchase constitute a kind of inventory that you're selling. It would be little different from a business selling trading cards or comic books, right? Or you could see it as speculative investment, like a trading card investor. As you suggest I think the difference is in the quantity - some trading card and comic book people do enough business to require opening a store, while others do it on the side.

FWIW in my case I didn't want to be in the business of holding a domain name solely to sell it. What I've looked for is domain names related to the websites I publish, specifically domain names where there was a former site that had links to the site, and I'm looking to gain benefit from those old links. I've bought a handful of domain names for that purpose, but have no idea if it's produced any benefit.