On Proper Reporting of Your
Sales on U.S. Personal Tax Returns
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
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.
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!
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.
second issue to resolve is treatment.
That is not whether to treat your hair with henna or crème;
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.
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.
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.
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,