Your selling price minus cost basis determines the profit. The tax amount would be the same as selling inventory, if you "inventory" several domain names (in other words, normal percentage depending on your business setup; LLC, corporation, sole-proprietor, etc). Otherwise, if you are selling a domain name that was an asset of your business, and took depreciation against this asset, and there is goodwill involved, call your accountant.
justablink

Like all other tax-related questions, the two answers are "It depends" and "consult with your tax advisor for the specifics about your situation."

In general, here are some questions to answer: How is the selling of thew domain name related to your regular business? How long did you have the domain? If you bought it before this year, how did you handle the tax treatment of the purchase? How was the domain used (if at all)?

Once you determine the actual treatment, the rate may or may not depend on your tax rate for other income.

[edited by: LifeinAsia at 3:53 pm (utc) on Mar. 12, 2007]

Its advisible to have a long term plan and to be consistent about how you treat domain related transactions. Therefore I'd suggest you talk with an accountant concerning how you deal with domain expenses and income.

The finer points of taxation include "letter rulings" which, to my understanding, are not binding on the IRS but may have some precedential value. Most webfolk don't keep abreast of letter rulings and the other fine points and weekly updates of tax law so I'd suggest you resort to professional advice. What you save by 'going cheap' can sometimes cost you many times over if the advice isn't robust.

Whatever tax advice people give here is to be followed at your own peril. I know how my accountant handles my taxes but, until there is a challenge and a ruling, neither she nor I know for certain. At this time the tax treatment of domains isn't quite crystal clear, lest not the last time I checked . . and as I statedd things are always subject to change based upon administrative and judicial interpretations.

Some issues to address with your accountant regarding your treatment of domains:

1. Assets, subject to capital gains and depreciation, or business inventory? Which will fly better?

2. Treatment of domain acquisition costs, for purchases below a certain level, as current expense?

I suspect each person's tax treatment will vary depending on the nature of their domain holdings, transactions, expense, etc. . . but I'm not an accountant so I have no assurances to offer, only personal experience and paid professional guidance that I hope is correct. ;)

We just sold a rather pricey domain (first one we ever sold) which we had sitting around for almost 10 years not really doing much. I checked in advance with our CPA and they're pretty much leaning, in our case, with a sole prop or simple partnership, towards treating it as bought as strictly a personal investment and doing it as a long term capital gain to benefit from the max capital gains rates. Or something like that (they handle all that technical accounting cr@p these days). But of course Your Situation Will Vary.