Profit from domain name sale

[Fermion]

Ok, it is getting near time to do taxes and I have to figure out how to report the $5,000 profit from a domain name I owned for ~13 years and sold in 2014 (I posted a thread about that at the time, kept getting higher offers).

I figured at the time it would be considered ordinary income and because we are in the top bracket, would pay about $1600 in tax. I bought the domain for use personally but did use it for a sole proprietor business from 2005 to 2010. I never deducted anything for fees and did continue to use it also for personal use (emails, sharing photos, etc.). Kind of muddy there.

I don't even know how it will be reported. The buyer was in the UK and the transaction was done on escrow.com but I did not get any kind of 1099.

It would be nice if I could treat it as a capital gain as I have $20,000 in carryover capital losses that could go against it. Amazingly, there is very little information on how to treat domain name sales. I don't really know what we pay the IRS for...they really don't DO anything to help figure out how to pay your taxes.

Other than this part, our taxes are quite simple and I like to do them myself. We take standard deduction and don't itemize since I have paid off our house. I am not interested in consulting a tax adviser since I have little faith they really know more than I do right now.

So....any non binding suggestions? Seems like the safest thing would be to treat it as ordinary income and pay the most tax...unless that somehow could come back to bite me?

 

[someguy]

I think technically the person you sold it to should have issued you a 1099-B which hits schedule D.

 

[GrayHare]

Sounds like a sale of intangible intellectual property, which I'd treat as Capital Gain / Loss.

 

[38Chevy454]

Ordinary income would be safe, but if you had it as a strict investment you might be able to use the long term cap gains. The muddy area is you used for business, but then stopped that and converted to personal use. I think the key here is that you continued to use it the whole time you owned it. It was never a purchase with intention to "buy and hold". Without a 1099 is there any official record of this money?

 

[trirod]

It's a long term capital gain.

Check out Section 1221 of the Internal Revenue Code, which defines what a capital asset is. The domain name falls squarely into this definition, whether or not you used it for business.

Relevant extracts are:

1221 (a) In general
For purposes of this subtitle, the term “capital asset” means property held by the taxpayer (whether or not connected with his trade or business), but does not include—

(1)stock in trade of the taxpayer or other property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year, or property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business;

(2)property, used in his trade or business, of a character which is subject to the allowance for depreciation provided in section 167, or real property used in his trade or business;

(3)a copyright, a literary, musical, or artistic composition, a letter or memorandum, or similar property, held by—
(A)a taxpayer whose personal efforts created such property,

(B)in the case of a letter, memorandum, or similar property, a taxpayer for whom such property was prepared or produced, or

(C)a taxpayer in whose hands the basis of such property is determined, for purposes of determining gain from a sale or exchange, in whole or part by reference to the basis of such property in the hands of a taxpayer described in subparagraph (A) or (B);

(4)accounts or notes receivable acquired in the ordinary course of trade or business for services rendered or from the sale of property described in paragraph (1);

(5)a publication of the United States Government (including the Congressional Record) which is received from the United States Government or any agency thereof, other than by purchase at the price at which it is offered for sale to the public, and which is held by—
(A)a taxpayer who so received such publication, or

(B)a taxpayer in whose hands the basis of such publication is determined, for purposes of determining gain from a sale or exchange, in whole or in part by reference to the basis of such publication in the hands of a taxpayer described in subparagraph (A);

(6)any commodities derivative financial instrument held by a commodities derivatives dealer, unless—
(A)it is established to the satisfaction of the Secretary that such instrument has no connection to the activities of such dealer as a dealer, and

(B)such instrument is clearly identified in such dealer’s records as being described in subparagraph (A) before the close of the day on which it was acquired, originated, or entered into (or such other time as the Secretary may by regulations prescribe);

(7)any hedging transaction which is clearly identified as such before the close of the day on which it was acquired, originated, or entered into (or such other time as the Secretary may by regulations prescribe); or

(8)supplies of a type regularly used or consumed by the taxpayer in the ordinary course of a trade or business of the taxpayer.

 

[Bestwifeever]

Here is an answer from TurboTax (procrastinating this morning til I pay some bills). It seems to apply to your situation. You can probably figure out where to put the amount if you don't use TT.:

https://ttlc.intuit.com/questions/2425578-sale-of-domain-name-at-a-profit

Q: I sold a domain name I owned for more than 10 years at a profit. I am using TurboTax online. Where do I report that?



A: It depends on if the domain name was a business or personal asset. If business, use Form 4797. Otherwise report the sale on Schedule D." Schedule D is for capital gains.

For form 4797, Go to Federal Taxes tab> Wages and Income> I'll choose what I work on> Business Items> Sale of Business Property. Just click on the Start/Update button

For Schedule D,

Select Federal Taxes (Personal in the Home & Business edition).
In Online TurboTax, click the bars at the upper left corner to show Federal Taxes on the selection list; enlarge the screen if needed to show the left side selection list.
Select Wages & Income, and in the new screen, click Explore on My Own.
Scroll down the Your Income Summary screen until you see the Investment Income group.
Click on the Start/Update button next to the Stocks, Mutual Funds, Bonds, Other category.

 

[utrecht]

In my book, no 1099 means I'm not reporting it at all.

 

[trirod]

In my book, no 1099 means I'm not reporting it at all.

Erm...that's called tax evasion.

 

[Meadbh]

I think technically the person you sold it to should have issued you a 1099-B which hits schedule D.

Do you really think a buyer in the UK would give a damn about US tax forms?

 

[GrayHare]

Hmm, the code says the following is NOT a capital asset:
"(3)a copyright, a literary, musical, or artistic composition, a letter or memorandum, or similar property, held by— (A)a taxpayer whose personal efforts created such property,"

Seems to me a domain name is "similar property", and if its value was created through personal effort, then it's not a capital asset, and thus should not be listed on Sched D. I'm not a tax professional though, and if the pros say otherwise I'll defer to them.

 

[Fermion]

I guess the problem is the world wide web is so new and I am unlucky to be one of the first to sell a domain. I should have waited a year or two for the IRS to hear about the web and domain names so they would be able to establish guidelines.

My fault for being an early adopter.

 

[target2019]

It is a grey area, but my best guess after reading some web hosting related sites is that it is a LT Cap Gain. You did use it in your business. You paid fees each year as a registrant. And you realized a pretty good gain when you sold it. I would definitely include it, as all kinds of things can happen between the UK registrant, their taxing authority, the IRS, and yourself.

 

[utrecht]

Erm...that's called tax evasion.

Good luck proving it. I'm sure you obey every gray area of every law right? We have lots of smart people here and they cant decide how to handle it. I bet you could ask 3 IRS agents and you would get different answers. Hes liable to make a good faith effort to file it the correct way only to get a letter from IRS telling him its wrong then hes going to have a real hassle. When the government simplifies the tax code to a point that the avg American can make heads or tails of it, then I'll worry about making sure my taxes are completely accurate.

 

[tulak]

In my book, no 1099 means I'm not reporting it at all.

I sold land last year that was outside the US. Using your logic, I should have just pocketed the gain, since I had no 1099.

What I did instead was report it as a long-term capital gain. It was a pain, since I had to deal with currency issues, determine correct cost basis, etc, all with no US paperwork. But if I didn't, then it would be tax evasion.

If I was in the OP's shoes, I would claim it as a long term capital gain. I would also make sure I calculate the correct cost basis by deducting registration fees, etc. I tend to think if you do the right thing, even if you're slightly off, the IRS won't hassle you. The amount here is small, so I doubt you'll hear from the IRS even if it wasn't filed correctly.

 

[utrecht]

If you play poker with your buddies and win a couple hundred, do you report that to the IRS? I bet not.

 

[pb4uski]

Good luck proving it. I'm sure you obey every gray area of every law right? We have lots of smart people here and they cant decide how to handle it. I bet you could ask 3 IRS agents and you would get different answers. Hes liable to make a good faith effort to file it the correct way only to get a letter from IRS telling him its wrong then hes going to have a real hassle. When the government simplifies the tax code to a point that the avg American can make heads or tails of it, then I'll worry about making sure my taxes are completely accurate.

Quite a horse's petute response there utrecht.

It would be quite easy to prove that the sale was not reported. Presumably the UK based buyer or escrow.com did an electronic transfer to the seller that would be reflected as a deposit in the seller's bank account and it would be obvious that it is not a transfer from another of the seller's bank accounts so the IRS would presume that it is income until the taxpayer demonstrates otherwise.

The IRS agent would then need to decide whether the failure to report was willful (aka tax evasion) or not (a simple mistake/oversight).

While I concede that whether to report it as ordinary or capital might be a grey area, that it needs to be reported isn't grey at all. That said, I would report it as a capital gain and if the service challenged that then we could argue about it, but at least then they could not claim that I was evading taxes by failing to report it.

 

[EastWest Gal]

In my book, no 1099 means I'm not reporting it at all.

My husband doesn't make much but more than half of what he makes does not generate 1099s. He still reports his income and pays his self employment taxes. Otherwise it would be tax evasion. My hair stylist owns her own business. I don't send her a 1099. But she reports her income and pays her taxes, of course. And I have reported gambling winnings. I don't gamble much at all anyway. It got really boring and pointless when I became FI.

Several sites, including Intuit's site, address this issue specifically, and in your circumstance it looks like this should be treated as a long term capital gain. If you had a business buying and selling domain names then the tax treatment would be different, it would be business income.


Sent from my iPhone using Early Retirement Forum

 

[ERD50]

Originally Posted by trirod View Post
Erm...that's called tax evasion.

Good luck proving it.

It's still tax evasion, regardless of how easy/hard it is to prove. Just like an unsolved murder is still murder.

We have lots of smart people here and they cant decide how to handle it. I bet you could ask 3 IRS agents and you would get different answers. Hes liable to make a good faith effort to file it the correct way only to get a letter from IRS telling him its wrong then hes going to have a real hassle. When the government simplifies the tax code to a point that the avg American can make heads or tails of it, then I'll worry about making sure my taxes are completely accurate.

I agree with the spirit of this. In my book, if the common man is to be held to the rule that 'ignorance of the law is no excuse', then the laws should be written so the common man can easily understand them. But as you say, not even the experts can agree many times.

Now, if you are involved in some complicated business, then I can maybe see that the laws get complicated (though they shouldn't), and you need a tax expert. But the common man, with common things that a common man (or woman of course), can do - like buy/sell stock and options, the laws ought to be straightforward.

I'l admit to one or two rare occasions when I took a simple approach to taxes, that probably did not meet the letter of the law. But I didn't try to rationalize it - it was technically wrong. My personal criteria are:

A) It must be a very small $ (and sometimes $0) amount.

B) It must be a gray area, where I could plead (or actually be) ignorant of the matter.

C) I'm honestly doing it for convenience, rather than for the money - like maybe saving the time of documenting a slew of transactions.

D) It was something extremely unlikely to trigger an audit, and if audited and found, it would most likely mean a few $ in back tax and interest at most.

An example - years ago, I traded a stock, bought sold several times, had a wash sale or two in the midst of all that. But I totally liquidated the position before the end of the tax year. I realized, that by liquidating the position, the intervening wash sales made no difference in my taxes due, they moved forward and were accounted for when I closed the position for > 30 days. So I decided to simplify the reporting. If I got 'caught', there would be no tax due. Could I be 'slapped' for improper filing? Maybe, but I decided to take my chances on that.

-ERD50

 

[Fermion]

I am going to report the sale even though I agree that it is likely the IRS currently has no information on it.

I am going to treat it as a long term capital gain, which will be offset by long term capital loss carryover. Since we are retiring this year, it is ok with me to use up this carryover loss (plus the $3000 I can use against ordinary wage income) as our federal tax will be dropping to zero or near zero and capital gains will be taxed at zero. 2014 and 2015 will be the last years I can make good use of the loss carryover ($5k plus $3k for 2014 tax year and $3k for this tax year). After that the remaining $9k of loss carryover will be useless.

I guess I still could get dinged if they force me to change the treatment from LTCG to ordinary income in an audit. Worth the risk to save $1600 IMO. What would my penalty be? 25% of $1600 plus interest? That is if I lost the appeal.

 

[Walt34]

If I was in the OP's shoes, I would claim it as a long term capital gain. I would also make sure I calculate the correct cost basis by deducting registration fees, etc. I tend to think if you do the right thing, even if you're slightly off, the IRS won't hassle you. The amount here is small, so I doubt you'll hear from the IRS even if it wasn't filed correctly.

Exactly. As was pointed out it isn't hard at all for the IRS to determine that the OP received the funds. There is to my knowledge no penalty for mistakenly misclassifying income but there most certainly is for tax evasion.

 

[Sunset]

I am going to report the sale even though I agree that it is likely the IRS currently has no information on it.

I am going to treat it as a long term capital gain......

I guess I still could get dinged if they force me to change the treatment from LTCG to ordinary income in an audit. Worth the risk to save $1600 IMO. What would my penalty be? 25% of $1600 plus interest? That is if I lost the appeal.

That is what I would do.
Its not clear so any difference is an interpretation difference or opinion difference, my experience has been they either accept your view, or they tell you why in a discussion, and just want you to correct the return and make the adjustment payment/refund.

 

[MichaelB]

There is to my knowledge no penalty for mistakenly misclassifying income but there most certainly is for tax evasion.

Well, technically, if you classify income incorrectly and that results in an underpayment you will be subject to a penalty and interest. OTOH, if you do not report income at all, the IRS treats that much more seriously, in some cases as a criminal offense, meaning jail in addition to penalties and interest.

 

[Alan]

In my book, no 1099 means I'm not reporting it at all.

This is why the US has brought in the new FATCA laws, because too many folks are not reporting foreign income. All the tax software I've seen ask the questions, "Did you have any foreign income?", and "Did you have signature authority over any foreign bank or brokerage accounts".

Answering "No" when it should have been "Yes" is willful tax evasion.

 

[Alan]

Well, technically, if you classify income incorrectly and that results in an underpayment you will be subject to a penalty and interest. OTOH, if you do not report income at all, the IRS treats that much more seriously, in some cases as a criminal offense, meaning jail in addition to penalties and interest.

Agreed.

For a number of years I reported my foreign pension on the wrong line of my 1040, but this year I finally reported it on the correct line. It makes no difference to the tax paid so I haven't filed amended returns.