Tax time for domainers?

There is a lively discussion at Mike’s blog today about taxes and domainers.

Mike points out the following:

Many domainers are US based, but other major domainers are located in tax free countries thereby giving those domainers huge advantages over the US based domainers.

Being a Canadian who moved to the Bahamas more than 10 years ago, I have seen a lot of corporate, legal and banking carried out by some of the world’s best. If you didn’t know, many of the richest people in the world call the Bahamas their “official residence” for tax reasons.

There are several legal ways to minimize your taxes. Depending on your citizenship, your mileage may vary.

How to incorporate

A good strategy is to form a corporation and put your domain assets into the corporation. That means if you buy a new domain, buy it with the corporation. If you sell the domain later, the corporation is selling it, not you personally. If you lease your domains, do the contract with the corporation and have the funds wired to your corporation. You get the idea.

Why incorporate? Two reasons, really.

1. The corporation owns the assets and is liable for taxes on any domain sales, parking revenue, lease agreements etc.

2. If your domains become involved in a legal dispute or lawsuit (Americans like to have their lawsuits) then the corporate assets are at risk, not your personal assets such as your house, car, stamp collection etc.

Why incorporate offshore? Ahhhh now here is the interesting part.

For item 1. above, the corporation will not be liable for any income tax because offshore jurisdictions are normally free from corporate or personal income taxes.

And for item 2. above, those annoying lawsuits go away pretty quickly once the person trying to sue you over silly things has to hire a local lawyer in say, Bahamas or Cayman, and subject themselves to the courts of a foreign jurisdiction.

Of course, if you are doing something illegal with your domains, then incorporating offshore is not going to protect you. Illegal activity is frowned upon and prosecuted the same offshore as anywhere else.

Bank accounts

I have seen many banks fail and many people lose their life savings. Use a bank that is large and has branches is many countries. Most of the offshore banks offer ATM cards and online banking.

It is a good idea to incorporate in one country and open bank accounts in another. This strategy is used by the rich and famous. It gives you one more layer of protection in the case of lawsuits.

Web hosting

So you have incorporated offshore, set up a bank account in one or two countries, you have your ATM card, your online banking and you are doing your domaining business as usual.

Are you still hosting your domains in the USA? Have you learned nothing so far?

Seriously, whether you get an offshore server in Bahamas or not, it doesn’t matter to me. But take my advice and get your web hosting out of the USA. Host your sites in Canada or Europe, if you don’t like the idea of hosting offshore.

Many large domainers could benefit from the following advice …

As long as your sites are hosted in the USA, the IRS can come to you and demand taxes. Their argument will be that you are doing business in the USA with US companies. They will seize your data, your assets, your parking fees etc and you will have to go to court to fight to get them back. If you are not an American and your assets are structured outside the USA, find a non-US host and eliminate the chance that the IRS comes calling on your door one day.

Look at what is happening with Amazon right now. They have to collect sales taxes from their customers in New York and perhaps Texas as well. They’ve become tax collectors !!

How long will it be before the parking companies or affiliate companies that domainers are using start collecting taxes from them? If you are hosted in the USA and doing business with the US parking and affiliate companies, it won’t be long …