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The Joel on Software Discussion Group (CLOSED)

I sold a domain name this past year and the people I sold to reported it to the IRS as 1099-MISC, section 7 (Nonemployee compensation).

This means paying a whole lot of tax on it as though I were self-employed.  For the life of me, I can't figure out how this should have been recorded.  Any ideas?

The money I got was for a sale, not for any consultancy.

I assume that you intended to make it look like a sale of a deliverable and not services. (which, conceivably, would be subject to sales tax, as well as offsets due to expenses.)

All I can say is, ugh - you should have not provided them with your SSN and you should have conducted the sale through a corporation or an LLC so no paperwork was generated.

I've had to scream at some clients to not 1099 me when it was inappropriate.

Get thee to a tax accountant.

"Render unto Caesar the things which are Caesar’s..."

If you make money on selling things beyond a trivial amount, expect to pay taxes.

I fully expect to pay taxes on this.  But I should only be paying on the amount above what it cost me, not the full amount reported by them.

Right now, I'm really looking at what this should be reclassified as (I do have a contract for the sale).

If it was over $600 then it would trigger a 1099 misc. However, you can deduct the amount that you paid for the domain, and whatever is left over is profit that you owe taxes on.

"But I should only be paying on the amount above what it cost me, not the full amount reported by them."

They are supposed to report the full amount you received from them. You will then be able to deduct your expenses on your tax return, leaving you only with net profit that you owe taxes on.

And again, the distinction being made here is between payment for services rendered, or payment for a delivered item.

In my state, the taxing authorities distinguish between taxable and non taxable sales (for sales tax purposes.) They even printed a pamphlet that described the case of delivering a fixed price software application, to which sales tax would apply, or writing a software application by the hour, which would be considered a personal service and not sales-taxable.

Again, I would ask a CPA for guidance on how to report this. I assume that the 1099 itself does not oblige you to a particular way to report the income.

The difference between "service" or "delivered item" is probably not important here, but under different circumstances it may be important.

It's your responsibility to report this correctly on your own tax return, and not blindly follow someone else's mistake.

I'm doubt this should have been reported on the 1099, but it depends on the buyer's business. If their business is buying & selling domain names it would be somewhat reasonable for them to report the payment on a 1099.

I think this should be reported on Form 4797 Sale of Business Property on your return (assuming your business is not buying and selling domain names). This means it's not subject to self-employment tax but is subject to ordinary income tax rates

Of course, you may get a letter from the IRS about the 1099, but all you need to do is _promptly_ reply explaining the discrepancy.