Question: One of my tax clients is planning to sell a website that he built. His business is an SMLLC. He does not regularly sell websites, but this is something that he plans to do this year. What are the tax implications of selling a website? Is there any IRS guidance on a gain computation in this case?

Christy's Answer: A domain or website is generally treated as a capital asset for tax purposes (generally, a Section 197 intangible). Therefore, the sale is given LTCG treatment if the taxpayer has owned it for more than a year. This is unless he's in the actual business of selling websites (a reseller). 

The IRS guidance is spotty in this area because the sale of intangible assets is complex and and digital asset sales are fairly new (with respect to tax law), so this is an emerging area of tax law.

The sale of a website can include a number of different assets:

• The sale of the domain (the web address, which is always treated as a capital asset unless the business is truly a reseller),
• As well as other copyrighted materials and digital assets that already exist on the website (logos, web design, proprietary software, etc.).

Most of the guidance out there is secondary, but this article does a good job explaining the basics of how the asset is treated. It also includes a link to a recent IRS CCA on the subject. IRS CCA 201543014 specifically discusses the treatment of costs associated with the acquisition of a domain, but the whole CCA is an enlightening read on the tax treatment of digital assets in general.

Now, for the specific scenario that you have described, a disregarded SMLLC is just treated as a self-employed person, so the sale of the taxpayer's website or domain would generally go on Schedule D, (although, once again, if the taxpayer is actually in the business of selling websites on a regular basis, the website could potentially be treated as inventory, but that would be rare).