Capital Gains Tax – Selling your Website
Selling your website or web business can bring in a lot of profit and with profit comes taxes. Unlike regular income though, the sale of a website can be classified as a capital gain, which means it’s subject to capital gains tax instead of federal income tax – this means you ONLY pay the capitals gains tax.
Note: If you are in the business of buying and selling domains regularly, you may not be able to classify the sale of a domain as a capital gain, as the domain sale would be considered regular business income in that case. Most webmasters should be able to claim the sale of their domain as a capital gain.
When calculating your federal capital gains tax you have to look at how long you owned your website before you sold it. Any “asset”, in this case the domain, held for more than 1 year (365 days) is considered a long-term capital gain and is taxed at a much more favorable rate of 15%. Any asset held for less than 1 year is considered a short-term capital gain and is taxed at the exact same rate as federal income tax (which goes as high as 35%). If you have a very valuable website that you’re looking to sell, you can save save a tremendous amount of money in taxes if you hold onto it for a full year before selling it – see the example below:
Let’s say you register a domain for $10, build an awesome website and sell it for $500,000.
Since you registered the domain name new and it cost you $10 we’ll need to calculate the “gain”, which is the sale price minus the purchase price. In this case, the sale price is $500,000 and the purchase price is $10. Which gives you a “gain” of $499,990. Let’s calculate the capitals gains tax on this $499,990 gain.
If you owned that domain for more than a year, you’ll pay a flat 15% – which is $74,998.50. The sale of your website has netted you $425,001.50
If you owned that domain for less than a year, you’ll pay 35% (Any dollar amount over $379,150 puts you in the 35% tax bracket) – which is $174,996.50. The sale of your website has netted you $325,003.50
By making sure you hold onto your website for at least a year, you’ll pay $99,998 less in taxes. That’s a HUGE difference!
Remember – in the eyes of the IRS selling an asset after owning it for 364 days means it’s a short-term capital gain. That single day can make a huge difference in how much tax you’ll end up paying!
Where to Report Capital Gains on your Tax Return
Capital Gains and Capital Losses are reported on Schedule D (Form 1040) of your tax return.
State Capital Gains Tax
Individual states have their own capital gains rules and regulations. If you live in a state like Nevada, which has no income tax or capital gains tax you don’t need to worry about this, but most states do have their own capital gains tax brackets, so you need to look those up on your own when filing your state tax return.