The US taxation of transactions involving domain name sales or purchases is the subject of a long and detailed article by Professor David Hardesty, CPA, MBA, author of 'Electronic Commerce: Taxation and Planning'.
Professor Hardesty distinguishes between the 'trademark' element in the valuation of a domain name and the intrinsic or non-business-related element. Thus, he gives Yahoo.com as an example of a pure 'trademark' domain name, whose value is entirely related to the value of Yahoo's business. The domain name yahoo.com would be worth very little if Yahoo's business didn't exist. It's a brand name, in effect.
On the other hand, the domain name drugs.com has value which is quite separate from any business that might be built using that name. It wouldn't be permitted as a brand, in intellectual property law, because it is generic; but the rules for domain names are different, so it can have value.
Many domain names have a value which is a mixture of 'trademark' and intrinsic elements, especially after they have established a business. For instance, the domain name of this news service, tax-news.com, would have an intrinsic value even if the news service didn't exist; as a business which carries advertising it has a separate 'trademark' value.
Professor Hardesty says that when a business buys a domain name, it can amortize the 'trademark' element of the cost under Section 197 of the IRC over 15 years; the intrinsic non-business related element would be amortised under Section 195 over five years either as a start-up cost, or a 'corporate organization' cost, or perhaps over its 'useful working life'. But that might be hard to determine.
The article deals with a number of difficulties surrounding the question of domain-name value and its taxation; also it discusses the special treatment that would apply to businesses that trade in domain names.
Read the full article at http://ecommercetax.com/doc/100100.htm
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