@evil_shenanigans wrote:
Wow! Lot to discuss here. But I'm a little confused where depreciation comes into it. Up to now I have filed a Schedule C for this activity. I've managed these domains as *inventory*, not as assets, as they were always intended for resale. However, if that's the case, I think there's no consideration of depreciation *or* capital gain, right? I would just be paying income tax on the sales price and deducting cost of goods sold in the standard way for inventory (i.e., how I've done it until now).
Conversely, if I consider these investments, not business assets or inventory, is there any depreciation to worry about? I thought the only consideration in that case would be figuring out the cost basis (i.e., whether or not I can recapture some of the registration costs).
We're starting to get out of my comfort zone at this point. The domain name is certainly an intellectual property asset to the company that buys it to use in business. It may be inventory to you, I'm not sure. But that would mean first of all, that you have already deducted the cost as a schedule C business expense when you brought them, so when you sell them now the entire amount is taxable income, because your cost basis is zero. Second, it would mean that there is no way to capitalize your carrying costs (even if it were allowed after tax reform) because it's not a capital asset. There are separate rules for what happens when you close a business and have leftover inventory to dispose of. Here's one answer.
https://ttlc.intuit.com/community/business-taxes/discussion/i-need-to-know-how-to-handle-inventory-a...
Here's another answer.
https://ttlc.intuit.com/community/business-taxes/discussion/we-are-closing-our-retail-business-and-w...
Did you ever close out your schedule C buisness? If not, then this inventory is still schedule C inventory, and you can't covert it to personal use without closing the business, either by filing an amended tax return for the last year the business operated, or by closing it this year.
You also say "up to now I've filed a schedule C" so the question still is, when did you stop being a business? Maybe you should keep listing it as a schedule C business even if your activity is low key. That way you can deduct the annual renewals as schedule C expenses instead of worrying about whether or not they could have been capitalized. The selling price is gross income, and you pay income tax and SE tax on the net profit.
If you close the business and convert the inventory to personal use, and you use the "reduce COGS method" on your last schedule C, then when you convert the inventory to personal use it has its original cost basis for you. When you then sell the domains as hobby income, your taxable gain is the difference between the selling price and the cost basis. It is still either a long term or short term capital gain, but the holding period for the capital gains calculation only starts as of the date you convert the inventory to personal use, not the date of the original purchase. And you would not have any way of recovering your carrying costs if you continue to hang on to them.
(Consider the example of a retailer who closes the business, puts everything in a storage locker, and sells their last few items as a hobby. After the 2018 tax reform law, there is no method to deduct the cost of the storage locker from the hobby income. You would be in the same position.)
