I am going to start off this article by saying that none of this is tax advice. You need to consult with an accountant or tax consultant, not listen to me. This is an article for discussion only.
I have talked to several different domain investors and several different tax advisors and the answers have been all over the board regarding how their domains are treated on their taxes. Many treat their domains as assets that depreciate and others treat them as expenses that are written off against sales. I feel both approaches can be fully defended but I will tell you what I do and why I do it.
My area of business is raising plants. It is a very unusual business from a tax standpoint as I make investments in root stock or “starts” and grow them on. Hoping that my purchases will grow in value with time. We expense these purchases because their value is not guaranteed. Many plants will die. Many will not be of quality. The hope is that they will sell and sell for great returns but only time will tell. They are product not assets. Our vehicles, buildings, and equipments are our assets. My bank will give me a loan on assets but they will not give me a loan on nursery stock or my domains. (not completely true as I can convince a farming bank to give us 25% of the value of our nursery stock if I use their nursery inventory specialist)
I treat my domain purchases the same way I treat an investment in a bare root tree. I am buying that domain in hopes that it will grow in value. In some cases I will “fertilize” it with a website to add value. Most people buy high priced domains because they feel that they have the best chance to hold value in the long run. While they aren’t guaranteed to grow in value, they certainly aren’t guaranteed to lose value in time like a car, truck, or equipment.
At this point I am still expensing my domain purchases. I am treating it just like the nursery stock I buy in. Treating it the same because I am buying something that essentially has no guaranteed value. It is not worth anything until someone comes and gives it value with a purchase. If I were giving it a value I would creating some price that is completely made up based on no more than my educated guess. In my opinion, making up values is not what I want to do.
Everyone I’ve talked to feels they can completely justify the way they handle their domain on their taxes. Which is good because there may be a point in time you will have to when you get audited. I feel eventually there will some kind of precedent set that clearly defines how a domain is treated. The first thing that comes to mind is treating it like stock trades but with each domain being a completely unique entity it really isn’t like trading. There is no easily defined market value for a domain. There value is what you paid for it and then immediately becomes zero until someone else gives it a value during the sale.
I know a lot of domain investors that also expense and thus the increase in purchases at the end of the year. I do the same in the nursery business. If I have made a decent profit I invest in pots, roots, and other expenseble items. The down side is if you are a full time domain investor and your taxes show no profits then you will not be able to borrow money for a home or car. But there will be an end. At some point you will either be left with worthless domains or sell everything without reinvesting and take the big tax hit. Taxes will be paid. Expensing does not get you out of taxes, it merely delays them.
Nice post Shane! I’ve been expensing on all of my tax returns.
I believe without using the IRS site or having an accountant discuss it (good future post ..) that they are basically capital assets similar to stocks – really options. When they expire/not renewed one has a loss (or if they sell at a loss). When one takes a profit they have a gain. You net your gains against your losses/not renewed as an individual come year end and you either have a net loss (carried forward) or a net gain taxed as Ordinary Income. If one Incorporates they can take more in expenses and income becomes earned income. Would love to read a future post on the topic from an accountant or two since I am not an accountant and like to keep things simple and legal.
I’ve had 2 different accountants, different states and it’s basically income and expenses. When I sell a domain, that amount is income. When I buy/renew a domain, that amount is a business expense. That’s it, easy.
Jonathan,
Agreed
Inventoried at cost with non-renewals a writeoff of inventory at avg cost (assumption is that current domain inventory could at least be sold at historical cost which often was a backorder plus renewals).
Great article Shane – Expensing my domains also during tax time.
If you buy a domain to develop. Like my hobby site, http://scrabblecheat.net then I will write it off over 15 years.
The IRS can be jerks when it comes to stuff like this.
Timely article, Shane
I went through the same discussion with two sets of accountants in the UK (and they weren’t entirely sure – expense them and at the end of the year, claim a depreciation in value of intangible assets? etc.)
In the end I took the same route – purchases/renewals are a business expense and sales are taxable income and I’m pretty happy to do it that way. Other people may have equally valid methods…. I’ve even heard people worrying about Capital Gains Tax (don’t know the US equivalent, sorry).
It’s very different than having a stock of widgets that cost $x, which you sell for $x+20 minus expenses of $5 (say)…..
John above offers a great synopsis of how to run a domain investing business. If you treat the domains as long term investments, you get taxed at capital gains rates, lower than regular income. Consult with a CPA, it’s the best $300 I spend every year.
Interesting question actually. I’m from the UK and I am paid to value all sorts of stuff for liquidators and administrators.
I’m not an accountant but I have controlled over a 1,000 domains at one time.
If you only ever hand register domains from new then I would suggest either process is valid.
As assets the question would be how to depreciate them. My gut tells me that they are either worth what you paid, more than what you paid or nothing. There are trigger points to that such as a drop, or a sale.
If you buy domains at a premium in the open market then they have been valued by that market and are clearly assets that you have acquired.
Whether you could choose to depreciate them over a period or not is a moot point.
If you are an investor, you bought in the belief they would increase in value. So in your view they won’t get cheaper. In that case how can you argue they should be depreciated over time?
You can of course re-value them at any time perhaps using offers received as evidence or against your own expertise.
In the UK if you left them on the books at what they cost then if you sold at a loss you would get tax relief. Plus of course you would have been claiming any expenses during the holding period.
If you sold it at a profit you would pay tax on the profit less any selling costs and the already claimed historic holding costs.
If you need to borrow money then you should probably hold domains as assets.
Nice article, Shane.
Again, comes down to the accountant, how you run your business, etc..
I’ve heard various answers from smart accountants.
I’ve been audited before. After the audit, the agent agreed that our treatment of the domains as assets was ok. . . . don’t recommend it for everyone. It’s all based on how you use the domains and what your business model is based on and where you plan on making your money in domains.
Highly recommend : http://www.domaintaxguide.com/
In fact we used it during “negotiations” .
I wish we’d gotten a formal letter from the IRS but that can take a lot more time and money.