1031 Tax Deferred Exchange of Internet Domain Names or URLs

I was speaking with a "Domainer" today and I thought this would be a good subject for my next blog post regarding 1031 Exchanges.  He was asking whether a Domainer could 1031 Exchange Internet domain names or website URL addresses for other Internet domain names or website URL addresses. 

What Is A Domainer?

First, you are probably asking yourself right about now what in the world is a "domainer" and what do they do.  I think you will be facinated by the technical definition.  I had to look it up for this post to make sure that I got it right, although I already had the general idea about domainers and domaining. 

Essentially, a domainer is someone that buys, sells, owns, and invests in Internet domain names or URL addresses for profit.  Domainers may buy and hold domain names/website URLs for sale or they may buy and position domain names/website URLs to product cash flow through a variety of strategies. 

Can You Defer Taxes On Sale of a Domain Name?

The question asked by this specific Domainer that called me was whether he could defer the payment of his capital gain taxes that resulted from the sale of an Internet domain name or URL address by buying (reinvesting in) another Internet domain name via a tax-deferred exchange. 

The short answer is yes.  The majority of taxpayers that are aware of 1031 Exchanges generally think that the strategy only applies only to real estate.  However, you can 1031 Exchange personal property, such as Internet domain names, as long as the Internet domain name was held for income production, investment or used in a trade or business. 

Domain names that are bought and held specifically for sale will not qualify for tax-deferred exchange treatment through a 1031 Exchange because they are treated as inventory in the Domainer's business and not as an asset used in the business or acquired and held for investment. 

Intent to Hold for Investment is Critical

The critical element in a 1031 Exchange of domain names is the Domainer's intent to hold the domain names for investment (as opposed to intent to hold as inventory for sale).  The sale and exchange of an Internet domain name that was acquired and held for investment or cash flow will qualify for 1031 Exchange treatment.  The sale of an Internet domain name that was merely bought and held with the intent to sell will not qualify for 1031 Exchange treatment.