Over @ Bogleheads we came across the following discussion: Offsetting
capital gains tax on sale of an asset?
by aguyyo » Tue Aug 12, 2014 11:59 am
I'm trying to sell a website I made. I understand the gain will be subject to short-term capital gains taxes because I only created the website a few months ago.
What expenses can I use to offset that capital gain? I can't deduct my time. I can deduct hosting and domain expenses. What about something like if I bought a desk so I could work more comfortably (I was previously just sitting on my couch with my laptop on my lap)?
Is there anything else I can do to minimize the tax burden (e.g. structure the deal a certain way)?
If it makes any difference, this isn't my full-time job, but web development has been an ongoing side project of mine for quite some time and I will continue to develop websites/apps heading into the future.
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Re: Offsetting capital gains tax on sale of an asset?
by pshonore » Tue Aug 12, 2014 2:18 pm
Sounds to me like you're running a business (creating websites). You have income from sale of a product ( a website) and expenses (equipment on which you develop websites, connection fees, software you purchased for web development, possible business use of home, etc. Your net profit is usually considered ordinary income reported on Sched C. Now if you bought or developed the website AND operated it and then sold it, possibly that might be considered business property and have different tax treatment. Tell us more
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Re: Offsetting capital gains tax on sale of an asset?
by roymeo » Tue Aug 12, 2014 2:25 pm
This is a self-employment job this is not an investment. Long/Short Term Capital Gains do not apply here. Any of the various tax products should walk you through your profit/loss, deductions, etc. If you're making very much from this you also may need to file estimated taxes.
The sewer system is a form of welfare state. | -- "Libra", Don DeLillo
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Re: Offsetting capital gains tax on sale of an asset?
by aguyyo » Wed Aug 13, 2014 9:35 am
I'm not making that much on this sale (just four figures). Short-term capital gains tax rate is the same as ordinary income tax rate so the distinction doesn't really matter.
The point of my question is which expenses can I reasonably deduct to lower the taxable income? Do they have to be related to that specific website, or since this is a side-business that I run, can I deduct other web development expenses I have?
For example, I'm selling website X. I also developed website Y & app Z, but they turned out to be nothing. Can I deduct the expenses of developing Y & Z against the income from the sale of X? They're all related via my general web/app development business.
What about physical materials? Buying a desk isn't directly related to web development, but I bought it because it enabled me to work more efficiently in the tiny space that is my studio apartment. How about if I buy a new computer? I'm looking to buy a Mac because Apple doesn't let you code iOS apps on a PC.
Is there something I can read that explains the dos & don'ts?
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Re: Offsetting capital gains tax on sale of an asset?
by pshonore » Wed Aug 13, 2014 10:47 am
The distinction DOES matter for tax purposes, believe me.
There are tons of books on Amazon relating to Small business and tax deductions. I recommend "Small Business Tax Deduction Secrets" by Stephen Nelson who often posts here as Seattlecpa. (Unfortunately I can no longer find the book on Amazon. He also has a website - http://www.stephenlnelson.com/
To briefly answer your question, all costs of developing a website(s) would be deductible as a business expense whether you sell them or not. Of course if you don't make a profit on a regular basis, the IRS may decide its a hobby and not a business and disallow your deductions. Some expenses (web connect fees, contract labor) are taken when you make the expenditure. Other, like office furniture and software (just to name a few) should be depreciated over the useful life of the asset. The IRS had guidelines on all this stuff in their various publications.
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