heres the IRS answer to my question on sale of a domain name
Thank you for your inquiry. A domain name which you create for yourself to use in a trade or business would be an intangible asset. An intangible asset may be subject to amortization. See the following discussion which is copied from Research Institute of America (RIA) on Westlaw. If you create numerous domain names anticipating that you will be able to sell some of these domain names to others, then you are creating an inventory of items which are basically held for sale to customers. IRS Publication 334, Small Business Tax Guide, says, "If you make or buy goods to sell, you can deduct the cost of goods sold from your gross receipts on Schedule C. However, to determine these costs, you must value your inventory at the beginning and end of each tax year." When these inventory items are sold to a customer, the transaction would be reported on Schedule C (Form 1040) if you have a one-owner, unincorporated business. This business income is reported on Schedule C, the exp
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nses (such as cost of goods sold) are reported on Schedule C, and the net profit (business income less business expenses) is subject to self-employment tax on Schedule SE if it exceeds $433.
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(C) Domain Names:
An asset that is unique to electronic commerce, and which is neither described nor accounted for under statutes, regulations, or rulings, is the domain name.
NOTE: Some have suggested that domain names should be treated for tax purposes the same as trademarks or trade names. Informal discussion with the IRS confirms that the IRS will accept such treatment for purposes of Code Sec. 197. ( See 3.01(B) for a list of assets comprising Code Sec. 197 intangibles.)
Conceptually, however, a domain name should be treated in the same manner as a trademark (or trade name) only if it functions in a manner similar to a trademark. A trademark derives its value from its association with a particular product, service, or company. For example, Coca Cola is a trademark that derives its value solely from its association with a famous product. The name "Coca Cola" probably does not have inherent value.
If a domain name derives value from association with a popular website, than it is functioning in a manner similar to a trademark, and can be called a "trademark equivalent" to the extent of the value of its association with that website. For instance, the domain name "amazon.com" has great value resulting from its association with the website of that name, and because of its association with the "Amazon" trademark. A domain name can reasonably be treated as a trademark, at least to the extent of its "trademark equivalent" value.
Domain names, however, may have "inherent value" as well as trademark equivalent value. Inherent value exists where the name has a market value exclusive of its association with a website, product, or company. For instance, the domain name "drugs.com" has inherent value. An online drugstore, for instance, would pay a substantial amount for the "drugs.com" domain name, if it were for sale.
Traditional trademarks generally derive value only from association with the goodwill of a product, service, or company. Domain names, on the other hand, have both trademark equivalent value and, in cases such as "drugs.com," inherent value. While trademark equivalent value can probably be treated in the same manner, for tax purposes, as a trademark, how should inherent value be treated?
NOTE: Inherent value clearly does not arise from its association with goodwill, and should probably not be treated, for tax purposes, in the same way as a trademark.
Where a domain name's inherent value is material, as may be the case for "drugs.com," it is necessary to account for that value. If not treated as a trademark, amortization of this asset will be controlled by Code Sec. 167. Under that section, this intangible should be amortized over its useful life (compare this to the treatment of a trademark, where amortization is fixed by Code Sec. 197 at 15 years). Unfortunately, the life of a domain name may not be determinable, in which case amortization may not be available.
Under Reg. 1.167-3(b), a taxpayer can treat any intangible as having a 15-year life, except in the following instances:
An amortization period is specifically prescribed or prohibited by the Code, Regulations, or other published guidance.
The intangible is listed in either Reg. 1.263(a)-4(c) or Reg. 1.263(a)- 4(d).
The intangible has a readily ascertainable useful life.
Based on this regulation, the minimum amortization period for a domain name is 15 years. However, it may be shorter if the taxpayer can establish a shorter amortization period.
NOTE: Some domain names will be primarily made up of trademark equivalent value, and should probably be taxed as trademarks in their entirety. Domain names with little trademark equivalent value should probably be taxed as assets having only inherent value. If a domain name both has material trademark equivalent and inherent value it may be appropriate to treat the domain name as being comprised of two separate assets, which are accounted for separately for tax purposes.
NOTE: While the IRS has informally indicated that it will accept trademark treatment for domain names, a taxpayer who opts for this treatment does so without explicit authority, but probably without much risk.
Treatment of a domain name as a trademark may not be the most beneficial route for tax purposes. The present value of 15-year amortization required under Code Sec. 197 is minimal. In addition, if the domain name is disposed of at a loss, the unamortized cost of the name is added to the cost of other Code Sec. 197 intangibles acquired along with the domain name. Code Sec. 197(f)(1).
If a domain name has material inherent value a taxpayer may be better off looking to justify amortization under Code Sec. 167 over a life shorter than 15 years. A shorter life is reasonable, given the likelihood that the economically useful life of any domain name today will likely be less than 15 years.
If a domain name is not treated as a trademark and thus not considered a Code Sec. 197 intangible, and if the taxpayer is unable to amortize the cost currently, a deductible loss may be available if the asset is disposed of or abandoned. If the domain name is not subject to amortization, it will likely be treated as a capital asset, and a loss on its sale will be limited under Code Sec. 1211. However, an ordinary loss usually results if a capital asset is abandoned rather than sold. Matz, Richard L., (1998) TC Memo 1998-334, RIA TC Memo 98334, 76 CCH TCM 465 (abandoned real estate resulted in an ordinary loss because there was no sale or exchange).
If a domain name is not a Code Sec. 197 intangible, but is subject to amortization, loss on its disposition will likely be an ordinary loss under the capital gain-ordinary loss rule of Code Sec. 1231 loss.
CROSS-REFERENCE: David Hardesty, Taxation of Internet Domain Names-Can They Be Shoehorned Into the 15-Year Amortization Rules? 93 JTAX 367 (December 2000); see "Electronic Commerce: Taxation and Planning", by David E. Hardesty (Warren, Gorham & Lamont, 1999), 8.02(6).
EXAMPLE: 88$@$88.com, Inc. is a successful online retailer. It sells all of its business assets to WebCo.com for $10 million. $1 million is allocated to the domain name, 88$@$88.com, which WebCo.com will continue to use. For tax purposes this domain name will likely be treated as a trademark. Since the domain name clearly has no inherent value its entire value must derive from its association with the successful website.
Summary:
The above discussion can be summarized as follows:
The exact treatment of a domain name is not known, since this kind of asset is not mentioned in either the Code or regulations.
Where the domain name has no inherent value then a good argument can be made to treat the domain name as a trademark equivalent, accounted for as a Code Sec. 197 intangible.
Where a domain name has inherent value then a good argument can be made to treat the domain name, to the extent of this inherent value, as an intangible that is not a Code Sec. 197 intangible. In this case, under Reg. 1.167-3(b), the minimum amortization period is fifteen years, although a shorter amortization period can be used if the taxpayer can factually support a shorter period.
A domain name that has both significant trademark equivalent value and significant inherent value may be treated as two assets, each amortized separately.
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