I wonder if any of you have discussed the tax implications of selling a website with your accountant/CPA? I have talked to one but it seems like most are really just guessing, so I'd like as many opinions and facts as possible. Unfortunately the IRS has yet to create any publication which clarifies the status of domain and website sales.
The main issue is whether the revenue from selling a website is ordinary income, or a capital gain. If you're in the business of flipping websites, then it's more clear cut -- this is ordinary revenue for you. But for those of us that run any other kind of business, and are selling a website of our own creation, or which we held for a long time, it's a lot less clear-cut:
On one hand, a website is like an asset. It is something which a business owns and which generates revenue for that business. If held for over a year, its sale would be a long term capital gain.
On the other hand, the sale of a copyright by the copyright creator is specifically excluded from treatment as a capital gain. This is to prevent people from creating assets and selling them while paying the much lower capital gains tax (up to 15%, versus up to 35% plus self employment tax).
But a website is not just a copyright. When you sell a site, you're selling a domain, website code, databases, customer lists, and the goodwill associated with the brand.
The one accountant I spoke to so far recommends treating the sale of a website, that has been held for over a year and which has content and traffic, as a capital gain. What do you think?
First, you should clarify that you are speaking about the United States, which has the tax %'s you mentioned. In the United States, more and more ordinary (rather than only super-wealthy) people are holding things like stocks which, when sold, have a capital gains tax (I thought it was after 5 years, but whatever) and real estate (though most normal people don't own something worth so much that they have to even worry about such a thing as capital gains).
A website is an awful lot like real estate in many ways. It is sometimes (but not always) a business. And as you mentioned, copyright may be an issue (how does that work with a business, where it may have a copyrighted logo, a trademarked tagline, and a physical presence (real estate)?).
In the US, there are separate rules regarding the sale of real estate, the sale of a business, and the sale of personal creation/art. No wonder your CPAs are confuzled. Seem likely that if there is no set law, to choose what you consider your website (a business? a place on the web? art?) and sell it as that.
I'd be curious to know what people do in other countries. I don't even know if there's capital gains in my country (probably, but never even heard it mentioned by anyone I know).
I am speaking from the UK perspective here but I would imagine it would be difficult to work out what the capital gain was.
Sure you developed a website from nothing and sold it for a particular value, but could you not include your time developing the site and subtract that from the capital gain?
Since their are no specific laws dictating which one applies, if would imagine that you can come up with a convincing argument for either then the Revenue would be happy.
Again, not facts from me, just speculation.
That would move part of the amount received from being a capital gain to being income instead. Since capital gains are usually taxed at a lower rate than income (at least they are in the USA and Australia) you'd be silly to move part of the capital gain to income unless you had to.
Not really, at least in the US. The amount you put into an asset is the basis, and capital gain is the difference between the sale price and the basis. Nothing gets moved to ordinary income in the sale of a capital asset.
But if you are claiming work you did on creating it as a basis for the capital gain calculation then isn't that amount the income that you are declaring for that work. If the work you did produced no income then there isn't an amount to add in as the base for the capital gain calculation.
If that wasn't the case then you just declare the base to be the selling price and get all the money tax free and the tax man gets nothing.
The money you earn from the work you did creating the web site has to be one or the other - either it is income and that income can then be adjusted for in calculating the capital gain - or - it produced no income and therefore doesn't affect the capital gain.
Basis is basically the value of an asset, which if you bought it, is the cost (depreciation aside). If you produced it, it's your expenses, not what income it generated.
Let's talk about a less ambiguous asset. Kinko's (the copy/fax chain) buys a photocopy machine for its store. This is a capital asset. It produces income for the business, because they use it to produce copies that customers pay for. If they turn around and sell this machine, the capital gain or loss is the difference between the sale price and the amount they paid, which is the basis. The income generated through use of the machine is not part of the basis, it is part of the company's ordinary income, and gets taxed there. Kinko's does not have to separately account for and consider the income each of their tens of thousands of photocopy machines was involved in producing.
The basis on a website sale, if treated as an asset, is going to be the costs associated with producing that website that aren't already accounted for as an ordinary business expense. Things like the current year's domain registration fee, or a brokerage fee paid to make the sale (Flippa success fee). This has nothing to do with income -- the income the website produced is the ordinary income of the business and is taxed separately as such.
I think the money you make running the web site would be considered income, the sale of a web site I believe would be considered a capital gain.
I can clear this up... Normally you will pay capital gains tax. If you CPA tells you that it has to count as income he does NOT know what he is talking about or is trying to rip you one because he is envies.
Additionally if you want to take that number down more go buy land tax credits from someone. You can end up paying as low as 60 cent to 86 cent on the dollar for taxes you owe.
If you CPA tells you otherwise; fire them ASAP and go find another one. I had one that burned me for years till one day I walked down the street to another firm and learned the hard way.
I have been building and selling sites for over 10 years. Some I sell within a month or less after launch because I don't like the result, otherwise I have keep them for as long as 5 years.
In order to claim for your time in producing it you'd have to take out an amount as income for the time spent. Only then could you increase the basis by that amount for the time you put in because then that income would be an expense against the web site development.
That's what I meant by claiming for the time spent converts the capital gain to income. I didn't mean income to the web site, I meant income to you as an expense against the web site. So the total tax you pay on the income for creating the web site plus the capital gain on selling it (assuming it qualifies as a capital gain) would be as much or more than if you were to not charge for your time in creating the site.
You have to account for the full selling price one way or another and so you want as much of it to be a capital gain as possible (after deducting the actual out of pocket costs).
I figured the answer would be clear cut. Sadly, it is not. The laws in the United States are insanely complex and written by idiots. I used to work in accounting. I hated it. :sick: When we had a question about a tax issue, we would have to go talk to the Tax Manager. He'd often try and get as an answer by perusing the IRS website. He wasn't always successful. Sometimes we'd have to get the legal department involved. Sometimes, they couldn't give a concrete answer because, quite frankly, tax laws can be vague.
Basically, when dealing with tax laws, you are ALWAYS walking on thin ice. You won't go to prison for making a simple mistake. But penalties and interest can add up.
A noncapital asset is property that is not a capital asset. The following kinds of property are not capital assets.
A copyright; a literary, musical, or artistic composition; a letter; a memorandum; or similar property (such as drafts of speeches, recordings, transcripts, manuscripts, drawings, or photographs):
- Created by your personal efforts,
- Prepared or produced for you (in the case of a letter, memorandum, or similar property), or
- Received from a person who created the property or for whom the property was prepared under circumstances (for example, by gift) entitling you to the basis of the person who created the property, or for whom it was prepared or produced.
Dispositions of Intangible Property
Intangible property is any personal property that has value but cannot be seen or touched. It includes such items as patents, copyrights, and the goodwill value of a business.
Franchise, Trademark, or Trade Name
If you transfer or renew a franchise, trademark, or trade name for a price contingent on its productivity, use, or disposition, the amount you receive generally is treated as an amount realized from the sale of a noncapital asset.
Even then, it refers you to other chapters. So the answer is: there is no answer yet. :rolleyes:
A website is many things, all intangible. A website contains copyrights, trademarks, and cash flows if it generates revenues. A website is also a domain name, which should be a clear-cut example of a capital asset.
If a book publisher is sold, are all the copyrights it owns separated out or is the entire business sale treated as a capital gain or loss?
My guess would be that if a website is sold in its entirety, it would be treated as a capital asset. However, calculating the cost basis of that asset is another matter entirely.
If the website were incorporated and you were the sole stockholder and sold your stock in the company, wouldn't that be a simple capital gain? But again, how is the cost basis calculated? I assume any revenue for which you already paid income taxes would be factored into the cost basis because your work is what created the value of the company and you have already paid taxes on the income derived from that work.
There are tax implications in how a business is sold as well. I don't know what they are. But I know that a business can be sold as a whole or it can be sold as assets.
When selling a business you have two options: You can opt either for an “entity sale” or an “asset sale.” Making the right choice between the two can help minimize the taxes that you will owe once the sale is complete.
The current regime in Washington is working hard to make our tax laws even more complex. :mad:
Felgall has a point. To establish your cost basis you need to identify the time you spent building the site and then assign your standard hourly rate or project rate to that. I don't believe you need to actually take the cash out of the company to show that the costs were there. Many start-up companies pay some of their employees (founders usually) in deferred salary. As long as the deferred salary is on the books then it should be part of the cost basis.
Once the product generates cash the employees are entitled to get their salary paid to them. If you can show all of the costs involved (salary, equipment, software licenses, domain names, etc.) then that would be your basis for the transaction.
I am not a CPA but I would think the web site as a whole would be a capital asset. Doing a quick definition search on capital asset I came up with this:
All "tangible property" which cannot easily be converted into cash and which is usually held for a long period, including real estate, equipment, etc.
Looking up tangible I came up with this: Having physical existence and/or form, or discernible through one or more senses.
You can see a web site. If you put audio clips in it you can hear it as well.
Other definitions for asset included terms like "not produced or sold in the course of normal business." So, if you are flipping web sites as a business then none of those sites would be a capital asset. But, if you are building a site to operate as a business and in the future decide to sell it then that could be considered a capital asset.
Making it way to complicated. Drop each build into a LLC or if your to lazy roll it once you sell it, but that creates a bunch of legal problems if your selling to a firm that hands you a book of legal papers for the acquisition so I recommend rapping it into some type of entity by itself.
If you are funding the startup, the capital will go into the LLC from you or the parent company, and would show as a fixed asset on your books while the LLC would snap each peace down by it's class requirement in their books then do what is was meant to do at the end of tax season by being a pass-through.
I sold two websites last year and, correct or not, they were taxed as capital gain. The revenue generated from the site was not taxed as that was already taxed through the years as income.
The revenue & profit from the site was used to dictate the sell price. The capital gain (difference between development cost and sell price) was what was taxed. To come up with the development cost I had to associate a price for initial development and each sequential version up until the sell.
In calculating the basis for any capital gain you can only include real expenses actually paid.
The only way you can include anything for the time you spent is if you have the business set up as a company and pay yourself wages. That amount is then income to you and an expense to the company that can be included in the basis for the capital gain calculation.
That reduces the amount of the capital gain but at the cost of increasing your own income.
If you don't have a separate company setup then you don't have the option for paying yourself for the time spent and so cannot include it in the calculation (at least not unless apportioning rules apply - as they do in the US).
With regard to the US rules for what is and isn't a capital gain I think http://www.toolkit.com/small_business_guide/sbg.aspx?nid=P11_2452 explains it fairly well. The two parties need to agree on how the price is allocated between the various components being sold. You'd need to show that all of the sale price has been allocated to capital assets in order to treat the full amount as a capital gain.
From my understanding of what that page says, whatever portion of the selling price equates to the compensation for the time you spent creating the site counts as income and then forms part of the basis on which the capital gain is calculated.
I din't think that there is the same apportioning rule here in Australia as there is in the US but here you need to have owned something for over 12 months before you can claim a discount on a capital gain. Any capital gains on anything sold within the first 12 months is taxed at the same rate as you'd pay on income and so if you were to defer collecting any payment for the time you spend on creating the site for at least 12 months then you might be able to claim the capital gain discount on the entire selling price (less expenses).
It's a simple capital gain and calculated
as such. What did you pay for it and what
did you sell it for (with a few other minor
but standard items in there) ...the CPA
that does your normal business taxes will
have already accounted for these items
and will be able to easily calculate the
It's really an awesome way to go as it's
taxed at the 15% capital gains rate instead
of the crazy, too high, income rate.
Even as a qualified accountant, i cant tell the difference. But there is a doctrine in our proffession that never fails. The one where you traet each 'revenue stream' separately. You could package these different aspects into goodwill under under indirect assets, clientele assets, code under copy right law and other aspects accordingly. Then you might find that you need to pay different rates for each different one.