1031 Exchanges of Internet Domain Names (URLs)
There has been a significant increase in the number of Tax Free Exchanges of internet domain names over the last few years as internet domain name investors ("domainers") learn more about the income tax benefits of this powerful tax-free strategy.
The vast majority of Tax Free Exchanges involve investment or rental real estate. It is estimated that Tax Free Exchanges of personal property, including internet domain names, account for less than three percent (3%) of the total transaction volume.
However, research indicates that the growth in Personal Property Tax Free Exchanges will be significant over the next decade as more internet domain name investors or domainers become aware of this tax planning opportunity.
Advantages of Tax Free Exchanges of Internet Domain Names
Internet domain names can increase in value for many reasons. The sale of an internet domain name or portfolio can therefore produce a profit (i.e. a capital gain), which in turn will result in the payment of either ordinary income taxes or capital gain taxes.
Tax Free Exchanges allow an investor or domainer to sell one internet domain name or a portfolio of internet domain names (their relinquished property) and buy one or more internet domain names (URLs) to replace the relinquished domains (their like-kind replacement property) while deferring the payment of their ordinary income taxes or capital gain taxes due from the sale.
Rules and Requirements for Tax Free Exchanges of Internet Domains
Tax Free Exchanges of internet domain names must comply with all of the regular requirements and guidelines for structuring Tax Free Exchange transactions pursuant to Section 1031 of the Internal Revenue Code, including compliance with the strict deadlines for the identification of replacement property and completion of the Tax Free Exchange. The following guidelines are specific to Tax Free Exchanges of internet domain names (URLs) .
Qualified Use Requirement - Intent to Hold for Investment and Not for Sale
Investors or domainers must have held or had the intent to hold the relinquished internet domain names (URLs) for rental (income production such as parking revenue), or for investment (capital appreciation) or for use in a trade or business, and must have the intent to hold the like-kind replacement internet domain names (URLs) for rental, investment or use in his business.
Internet domain names (URLs) not held for rental, investment or use in a trade or business are generally not considered to be qualified use property and will therefore not qualify for Tax Free Exchange treatment. This includes internet domain names that are acquired and then immediately listed or held for sale (i.e. inventory in an internet domain business).
It is important that investors or domainers demonstrate their intent to hold for investment and avoid any activity that might indicate the internet domain name was acquired specifically to list for sale and therefore hold as inventory.
Like Kind Property
Relinquished property and replacement property must be like-kind property to each other in order to qualify for Tax Free Exchange treatment. Therefore internet domain names can only be exchanged with or for other internet domain names in order to satisfy the like-kind requirement.
