What ARE domains? Need Help

[sashas]

This is gonna be a lot of questions, but some very fundamental ones, I believe.


What exactly are domain names? What do you classify them under? Are they intellectual properties? Do they come under investments such as stocks, etc.? Is it real estate?

Where are domains located? If you're buying/selling names in the US, does it mean that the domains are "located" in the US? Or are they located in the registrar's country?

And what is domaining? Is it self employment? We all get monthly incomes from our parked pages, so it would be classified as self employment, I assume.

I need some explanation on this topic. I think I may have to quit domaining because of it infringing on my current visa status here in the US (I'm here on a student visa). I plan to go to an immigration attorney and verify if domaining would come under the list of activities a foreign student can do in the US, but for that, I would need to explain to him what actually constitutes domaining and domains. There are a whole lot of gray areas here, and if some of the legal experts here can clarify them, it would be great.

 

[Domagon]

I'm not an attorney, but the following is based on my over 10 years experience in the domain name business...

What exactly are domain names? What do you classify them under? Are they intellectual properties? Do they come under investments such as stocks, etc.? Is it real estate?

* Domains are specically formatted alphanumeric labels (ie. often words) that point to an internet resource, such as a webserver.

* Domains in and of themselves are not intellectual property, but can be protected, if associated with a business, product, etc that involves intellectual property ... ie. a domain name that's the same as that of a TMed product.

* Domains are typically viewed as intangible property (accounting can be similar in many respects to stock investments). Virtual real estate is a simple layman's way to explain what domains are.

Where are domains located? If you're buying/selling names in the US, does it mean that the domains are "located" in the US? Or are they located in the registrar's country?

* Domains themselves are entries in a various databases that are recognized / acted upon by computers throughout the internet.

Where a domain is phyically located is difficult to say ... though presumably one could logically conclude the location is the master registry ...

But that would likely be wrong ... it gets very tricky - while many people view a domain name as one unit, it actually consists of multiple parts ...

Ie. example.com ... "example" is the 2nd level part and "com" is the 1st level part (TLD) ... the TLD part is stored in a master database stored by IANA (ICANN) while the 2nd level part is stored in a master database by VeriSign, and most often also stored in a registrar database too.

In short, discussing where a domain name is phyically located is a nebulous topic with no simple answer.

* However, in regards to jurisdiction, things are a bit clearer ... typically, jurisdiction is determined by where the registrant and/or registrar are located.

While it's logical to assume where the registry is located would also matter, it often does not in regards to determining jurisdiction - so again to be clear, it's where the registrant (ie. you) and/or the registrar are located.

And what is domaining? Is it self employment? We all get monthly incomes from our parked pages, so it would be classified as self employment, I assume.

* Domaining is typically consists of buying / selling domain names and/or earning revenues from passively "parking" domains.

* Selling a domain is typically accounted as a capital gain (rarely a loss); investment income.

While monies earned from parking, advertising, selling products, is typically considered regular income, which in many instances could be considered "self-employment".

Hope this helps.

Ron

 

[sashas]

Domagon,

Thanks a lot for the info. Really appreciated. Its a lot of insight.

While I did believe that earning money from parking would constitute 'self employment', investing in domain names itself should fall under 'investments' or rather, entrepreneurship (which is legal for a student on a visa in the US). I have no developed websites, nor do I plan to develop any (had thought about it, even got a hosting account and asked people here for help, then changed my plans

I will see an immigration attorney with this info and see what he says. I don't plan to be in the US after I graduate, but until then, it would be hard to give up domaining...its just fun...

 

[Dave_Z]

I plan to go to an immigration attorney and verify if domaining would come under the list of activities a foreign student can do in the US

I don't know why I don't find that a good idea. Probably my gut feeling.

 

[sashas]

what? going to an immigration attorney?

 

[labrocca]

Domains are typically viewed as intangible property (accounting can be similar in many respects to stock investments).

INCORRECT..and dangerous to believe.

Domains are NOT an intangible property. They are contracts for intangible goods. Stocks are something you OWN...you have rights to X percent of a company. With a domain..you are under a contract which has no value in actuality. At any time the registry can remove your domain and NOT compensate you 1 cent. These contracts allow you use for a domain on a per year basis. It's actually not an asset..they are a liability. Reg fees, renewals, and purchases of other constracts are strict liabilities. When you sell a domain..it's a sale of your contract rights to another person. It's a capital gain. The contract themselves have no value.

This is really important that domainers understand this. If the government decides otherwise then they could certainly tax domains based on their value. However domains have ZERO value until sold. The contracts are themselves valueless. If I own asfgsdwqascvsdv.info or damage.com they have the same value...ZERO. If you earn parking revenue that's a simple income.

It's a bit confusing but domainers should be united in keeping domains from becoming property. We gain advantage of certain rights but ultimately smaller domainers will suffer from taxes. If domains become property then we must pay taxes on them as inventory even if they are not sold or earning money. That would be a nightmare forcing domainers to have their entire portfolio appraised at tax time, a near impossible task.

 

[Domagon]

You make a good point about taxes, but your approach, in my view, comes with its own pitfalls far worse...

If domains are valueless, then surely when a registrar purposedly or accidently deletes / takes / transfers a domain, their liability is zero?...

Umm, that doesn't square with reality ... all one need do is look at court rulings, such as Sex.com ... if the Sex.com domain was worth zero, as your approach would suggest, then NSI/VeriSign wouldn't have owed the true owner anything beyond the renewal amount paid for the domain (around $50/year back then) ... obviously, the reality, from what I recall, was quite different with NSI/VeriSign paying a substantial settlement.

Also, if domains are worthless, then what is the contract's underlying value based on then? ...

And on a related note, you speak of inventory ... domains held by registrants, in many instances, are not inventory.

But anyways, in my view, taxation of domains (well beyond the nominal ICANN fees) is not a threat anytime soon; the IRS so far has chosen to stay on the sidelines in regards to domain accounting methods ... local taxing authorities, in many places, lack the ability to tax domains even if they wanted to ... and states / congress is focused elsewhere in regards to taxation.

Ron

 

[sashas]

Interesting insights. Technically, domains have no value. Hypothetically, Sex.com is no more valuable than ao2xxlfjx.com. If I can find a buyer, I can, technically, sell a02xxlfjx.com for 10 million.

This is a huge gray area here. One question though: Would buying and selling of domain names (and not parking them/earning monthly parking income) be termed as "self-employment" too, or would be simply investment income (akin to a stock broker earning money through selling stocks)? As a student on a student visa, I can invest money in stocks/bonds/mutual funds etc. However, I cannot be "self employed".

I think that the big domainers should really get together and get this industry some recognition. There are really a lot of unsaid, unanswered questions here.

 

[DNQuest.com]

One small correction, it depends solely on how you are setup if you have to claim capital gains or registering revenue. A LLC or Sub-S are your best ways to go. You could go sole proprietorship and keep a seperate accounting system from your personal accounts and treat the accounting like a LLC or Sub-S. As mentioned, all renewals, purchases, drop costs are liabilities and all sales, PPC, adsense, etc are revenue. If you use capital gians, you can only realize the liability on the domain you sell. Domains are not inventory, they are leased property. I agree 100% with Jesse that you don't want the government to view these as property, real or intellectual, either way, once they are defined, the IRS will not be far behind.

 

[Dave_Z]

Umm, that doesn't square with reality ... all one need do is look at court rulings, such as Sex.com ... if the Sex.com domain was worth zero, as your approach would suggest, then NSI/VeriSign wouldn't have owed the true owner anything beyond the renewal amount paid for the domain (around $50/year back then) ... obviously, the reality, from what I recall, was quite different with NSI/VeriSign paying a substantial settlement.

And of course, NSI subsequently rewrote their contract. There's at least one
decision that adopted a rather "interesting" argument:

http://davezan.com/sizevsnsi.txt

In this case, the terms of the Agreement established [**14] the legal
relationship between Size and NSI. Although the parties dispute whether a domain
name is "property" which can be converted, we need not reach that issue today.
Regardless of whether the size.com domain name is deemed to be "property," Size
agreed to be bound by NSI's domain name dispute policy, and any allegations of
misfeasance with regard to NSI's transfer of the domain name to Enom would
necessarily have to be based on a failure to comply with the procedures outlined
in that policy. See Decl. of John Hornak, Ex. A. at P 8. Similarly, allegations
that NSI was negligent in transferring the domain name after notice of Ilin's
forged authorization could only stand if the notice was sufficient under the
Agreement to trigger a responsibility on the part of NSI to freeze the domain
name and investigate the forged authorizations. Size cannot now circumvent the
Agreement's terms by arguing that NSI owed it broader legal duties than were
covered explicitly in the contract. Therefore, Count VIII (Conversion) and Count
XI (Negligence) will both be dismissed as against NSI.

On the side, I saw in justia there are a couple of suits filed against them. We'll
see how they go, I guess.

Essentially, sashas' question isn't really "what are domain names?", but "how
will they be treated?".

 

[Domagon]

NSI (no longer owned by VeriSign) can rewrite their contract until they're blue in the face ... I doubt that would any meaninful difference in the outcome for the "theft" (fruadulent registrant transfer) of a high-profile domain, such as Sex.com.

In regards to "size.com" ... pay special attention to the paragraph in the ruling, which I've quoted below:

Nothing in Size's allegations suggests that NSI exceeded its role as a
neutral stakeholder with no direct involvement in the activities of the
allegedly infringing third party. There is no allegation, for example, that NSI
failed to follow its own procedures in transferring the registration of the
size.com domain name to Ilin. Nowhere in the Renewal Form did Size explicitly
state that the Earthlink address was no longer a valid point-of-contact address,
and Size's indication that its former point-of-contact was no longer employed
with the company appears on its face to be inconsistent with its agreement on
the Renewal Form that none of its administrative contacts would be changed.
Moreover, when parties dispute the legality [**12] of a registrant's
association with a domain name, the Agreement specifies a formal process which
the parties must use to resolve that dispute. See Decl. of John Hornak, Ex. A at
P 8. Size has not alleged that it attempted to comply with NSI's established domain name dispute procedures once it discovered that Ilin had effected an
unauthorized transfer of the size.com domain name.

Key points, based on my interpretation:

* Transfer of "size.com" was facilitated through using an email address that was previously authorized by the registrant.

* That email address was utilized by an authorized point-of-contact acting on behalf of the registrant of "size.com" ... whom later neglected to update the email address / remove authority when that person left.

* The registrant of "size.com" did not try going through the formal process at NSI to dispute the legality of ownership.

This, collectively, is an important, distinct difference over the Sex.com saga in which a totally unrelated 3rd party using totally unrelated point-of-contact information (bogus fax) to "steal" it.

Getting back to the question at hand, regardless of whether domains are intangible property or licenses or leases, the consensus appears to be that domain name sales are typically treated for accounting purposes, in simplistic terms, as investment income much like selling a stock.

Ron

 

[Dave_Z]

This, collectively, is an important, distinct difference over the Sex.com saga in which a totally unrelated 3rd party using totally unrelated point-of-contact information (bogus fax) to "steal" it.

While off-topic to sasha's thread, my point is that NSI has learned a lot from
the sex.com dispute and taken steps to ensure history doesn't repeat itself.
And you can bet other registrars have as well, especially those incorporating
a term that registering a domain name doesn't grant you property rights, title,
etc.

Besides, it's the judge's interpretation that matters, not ours.

 

[verbster]

A LLC or Sub-S are your best ways to go. You could go sole proprietorship and keep a seperate accounting system from your personal accounts and treat the accounting like a LLC or Sub-S.

If you form an LLC, it may not be what you think. For example, if you are the only "member" of the LLC, the only person on the paperwork, it will be considered a sole proprietorship for taxes.

 

[fatter]

the problem with domains is there is very little case history, being congress has passed no laws its up to the IRs to challenge taxpayers in court to set precedence. I was told by an IRS agent that right now domainers are reporting their income in several different ways.They do have guidlines I lost my on my last computer crash though. I think the people who have to be extremely carefull are the ones who have online businesses and parking revenue and not reporting it at all the irs has hired web savy people who cant track whois info domain traffic etc and investigate
and beleive me if people dont track everything the IRS applies an expected income value, I have had friends los a lot of money from businesses because without paperwork IRS assumes 100 percent markup from wholesale to retail.

 

[labrocca]

Asking what a domain is worth is like asking what an email address is worth imho.

Sex.com is an interesting case and obviously took a lot of legal wrangling to get where it is today. Certainly no one wants that for domains.

I report all my online income but I know if I had to declare my 500 domains as X inventory value that I would be forced to pay a LOT more in taxes every year.

I am glad to see other domainers agree with me (thanks Phil) on this.

 

[sashas]

Thanks for all the input guys, appreciated.

Frankly, this industry has very little stability (in terms of laws etc.) and domaining is a very risky preposition.

 

[Dave_Z]

domaining is a very risky preposition.

Well, no risk no gain. :D

 

[DNQuest.com]

Yeah Jesse, though my portfolio has dwindled down, I like the uncertain area domains lie. Once they are defined, the IRS will get theirs (transfer tax to be paid at the time of transfer to be collected by the central registry??? how scary would that be?) just speculation on my part, but think of the consenquences.

 

[sashas]

I just got a reply from John Berry Hill. Here's what he had to say about domains:

"A domain registration is primarily a right incident to a service contract – i.e. a contract for domain registration services"

This is pretty much what Labrocca said before.

 

[Dave_Z]

I just got a reply from John Berry Hill. Here's what he had to say about domains:

"A domain registration is primarily a right incident to a service contract – i.e. a contract for domain registration services"

This is pretty much what Labrocca said before.

And there, sashas, is the catch. Your registrar contract defines what domain
names "are" the moment you sign up with them, and they state one another's
responsibilities.

For now, the IRS or whatever tax authorities likely doesn't know and doesn't
care...except to collect taxes whenever applicable under the law. :D