This article is taken from domainshane.com. This is a good article and must read about it.
By shaneCultra
I am going to start off this article by saying that none of this is tax advice. You need to consult with an accountant or tax consultant, not listen to me. This is an article for discussion only.
My area of business is raising plants. It is a very unusual business from a tax standpoint as I make investments in root stock or “starts” and grow them on. Hoping that my purchases will grow in value with time. We expense these purchases because their value is not guaranteed. Many plants will die. Many will not be of quality. The hope is that they will sell and sell for great returns but only time will tell. They are product not assets. Our vehicles, buildings, and equipments are our assets. My bank will give me a loan on assets but they will not give me a loan on nursery stock or my domains. (not completely true as I can convince a farming bank to give us 25% of the value of our nursery stock if I use their nursery inventory specialist)
I treat my domain purchases the same way I treat an investment in a bare root tree. I am buying that domain in hopes that it will grow in value. In some cases I will “fertilize” it with a website to add value. Most people buy high priced domains because they feel that they have the best chance to hold value in the long run. While they aren’t guaranteed to grow in value, they certainly aren’t guaranteed to lose value in time like a car, truck, or equipment.
At this point I am still expensing my domain purchases. I am treating it just like the nursery stock I buy in. Treating it the same because I am buying something that essentially has no guaranteed value. It is not worth anything until someone comes and gives it value with a purchase. If I were giving it a value I would creating some price that is completely made up based on no more than my educated guess. In my opinion, making up values is not what I want to do.
Everyone I’ve talked to feels they can completely justify the way they handle their domain on their taxes. Which is good because there may be a point in time you will have to when you get audited. I feel eventually there will some kind of precedent set that clearly defines how a domain is treated. The first thing that comes to mind is treating it like stock trades but with each domain being a completely unique entity it really isn’t like trading. There is no easily defined market value for a domain. There value is what you paid for it and then immediately becomes zero until someone else gives it a value during the sale.
I know a lot of domain investors that also expense and thus the increase in purchases at the end of the year. I do the same in the nursery business. If I have made a decent profit I invest in pots, roots, and other expenseble items. The down side is if you are a full time domain investor and your taxes show no profits then you will not be able to borrow money for a home or car. But there will be an end. At some point you will either be left with worthless domains or sell everything without reinvesting and take the big tax hit. Taxes will be paid. Expensing does not get you out of taxes, it merely delays them.
