I generally don’t preface an article with a disclaimer, but I think it is important to note at the outset that I am not an accountant nor should any of this be construed as accounting or tax advice!
Let’s say I buy a domain name at auction for $1,000 and re-sell that domain name a month later for $10,000. I might be inclined to go out and acquire an even better name for $10,000 or purchase two $5,000 domain names. I might even be inclined to buy a domain name for $5,000 and upgrade my office with the remaining $5,000. By doing this, there will be no money remaining to pay taxes.
When I sell a domain name, my first inclination is to reinvest the funds in another domain name or several domain names. I always like to keep great domain names in my portfolio, and reinvesting helps to ensure that my portfolio continues to improve. Even with this inclination, I need to be cognizant of the taxes that will be owed as a result of a sale. With a fluctuating business like domain investing, this can be a big challenge and can become a massive issue for a person or a business.
Many small business owners in the US pay quarterly estimated taxes. This is helpful because it should prevent a massive tax bill unless sales are far greater than the prior year. I have been on both sides of this, but in general, I appreciate paying the quarterly taxes.
For those people who are new to domain investing or who make an unexpectedly large sale, it is important to keep taxes in mind. There are many ebbs and flows when it comes to domain name sales, and having enough funds on hand to pay taxes is critically important.
There are a number of ways people and companies treat domain names and domain name sales for tax purposes. An accountant or other financial services expert can help a domain investor determine the best way to treat domain sales and investments. I have been using a corporate accountant since I started out, and that was one of the smartest decisions I made.
Throughout the course of the year, many opportunities will arise. Knowing when to buy or pass is essential, especially when it comes time to pay taxes.