@evil_shenanigans wrote:
Certainly it would be easiest for me to just continue to treat the domain trading as a Schedule C business as I've done for years now. The only relevant question for me is whether it's appropriate/legal to treat it that way: i.e. should they always have been personal property (Schedule D investments)? Or should I have converted them to personal property at the end of the first year when I gave up actively pursuing this business?
It's definitely not worth my time to try and figure out how to maximize my deductions or anything; the simplest legal/appropriate method of handling this is what I'm going for here.
It seems like my options are these:
- Continue to treat this as a Schedule C business as always (with the domains as inventory).
- Close the business, converting the domains to personal use ("purchases withdrawn for personal use"), and paying Schedule D capital gains on the cost basis for any future sales.
- Simply ignore previous years, treating the domains as Schedule D personal property from now on, and paying Schedule D capital gains on the cost basis for any future sales. (Optionally, amend all the previous returns, though frankly I don't see myself getting around to that.)
What do you think? I'm not sure if there's a net difference in taxes I owe between options 2 and 3 or merely a recordkeeping discrepancy.
I think you can probably keep your inventory as a business inventory even if you stopped pursuing the business briefly, assuming you reasonably plan to return to business. So I think you can still file a schedule C this year even if you skipped it for a couple of years. (Again, consider the owner of a toy shop who closes the store due to illness and packs the inventory into storage, then a few years later, resumes business activity by selling the items online in a virtual store. The items were never really converted to personal use.)
The difference between #1 and #2 is that, as a business, you can deduct your ongoing maintenance and carrying costs, such as annual renewals, but you pay income tax AND self-employment tax. As a hobby, you need to properly close down the business including converting the items to personal use. (You could do that in 2020 or by amending 2019. Ideally you would do it in a year when you had at least some income to cover the COGS adjustment on the inventory converted to personal use.) You will eventually pay less tax as a hobby (once the holding period for the domains is more than 1 year) but you can't deduct carrying costs.
It's hard to say which is better, I guess it depends on what your carrying costs will be as a percentage of eventual selling prices. The higher the carrying costs, the better option #1 becomes.
I don't like #3 just because I prefer to follow the rules. Even with #3, we have to assume your cost basis in the assets is zero, since the price was deducted as COGS when you bought them.
Frankly, this all sounds like a monkey trap--there is a jar with a banana in it; if the monkey grabs the banana, his fist is too big to get his hand out of the jar, but if he lets go of the banana to take his hand out of the jar, he loses the banana.
You own these domain names that you paid for, that you keep paying for, and that you believe will someday sell for more than your total investment, but you aren't really interested in actively marketing them and want to wait for customers to find you. If you let them expire, you lose your sunk costs, but if you keep them, your costs keep going up, and your return on investment is always "maybe some day." Do you really need the tax hassle on top of that? Maybe it is time to just let them drop and do something else.
