Website Acquisition Tax Guide

Capital gains vs. ordinary income

For most individual sellers, proceeds from a website sale are treated as a capital gain. If you held the website for more than 12 months, the gain qualifies for long-term capital gains (LTCG) rates, 0%, 15%, or 20% depending on your taxable income. Gains on websites held 12 months or less are taxed at ordinary income rates (up to 37%). See the holding period glossary entry for the tax math on common deal sizes.

Exception: if you are in the business of buying and selling websites, a serial pattern of rapid acquisitions and resales, the IRS may reclassify your gains as ordinary income (dealer property rules). This is rare for investors holding sites 12+ months but relevant for active flippers. See website flipping tax considerations.

Self-employment tax on website income

Operating a website as a sole proprietor generates self-employment income subject to SE tax of 15.3%(12.4% Social Security + 2.9% Medicare) on net earnings up to the Social Security wage base. This applies to the ongoing operating income, not the gain on sale itself. However, if the website's operations were classified as an active business rather than a passive investment, the sale proceeds may also carry an SE tax component. Running the business through an S-Corp can eliminate SE tax on distributions above a reasonable salary, see the entity structure section below.

Installment sale election for seller financing

If you offer seller financing, receiving part of the purchase price over time, you may elect installment sale treatment under IRC Section 453. This spreads your capital gain across the payment years, potentially keeping you in a lower tax bracket each year rather than recognizing the entire gain in the year of sale. The installment sale election is automatic unless you opt out; consult a CPA before structuring any seller note to understand the interaction with depreciation recapture rules.

Asset sale vs. entity sale tax treatment

In an asset sale (the most common structure for website acquisitions), the seller recognizes gain or loss on each individual asset. Most website assets, goodwill, customer lists, domain names, are Section 1231 assets eligible for LTCG treatment after 12 months. In an entity sale (selling stock or LLC membership interests), the entire gain is typically treated as a single capital gain on the business interest. Buyers strongly prefer asset sales for the depreciation benefits they receive; sellers sometimes prefer entity sales to avoid depreciation recapture on assets previously depreciated.

The purchase is not a taxable event

Buying a website is not itself a taxable transaction for the buyer, you are exchanging cash for business assets with no immediate tax consequence. The tax implications arise from how you allocate the purchase price and how you subsequently depreciate or amortize those assets.

Section 197 intangible amortization (15-year deduction)

The most important buyer tax concept in website acquisitions. Under IRC Section 197, most intangible assets acquired in a business purchase are amortized over 15 years using straight-line depreciation, regardless of their actual useful life. For website acquisitions, Section 197 intangibles typically include:

• Goodwill and going-concern value
• Customer and subscriber lists
• Domain names and trademarks
• Covenant not to compete
• Franchise, license, or permit rights

Example: A $150,000 website purchase where $120,000 is allocated to goodwill and intangibles yields $8,000/year in deductible amortization ($120,000 ÷ 15) for 15 years. This reduces your taxable income by $8,000 annually and is one of the most underappreciated tax advantages of website investing versus index funds or real estate.

Purchase price allocation in the APA

The Asset Purchase Agreement must allocate the total purchase price across asset classes per IRS Form 8594 rules. The allocation matters because different asset classes are treated differently: tangible assets (equipment, inventory) may be depreciated faster under Section 179 or bonus depreciation; intangibles under Section 197 are amortized over 15 years. Both buyer and seller must file Form 8594 with consistent allocations. Negotiate the allocation carefully, buyers prefer more allocated to assets with faster depreciation; sellers prefer more to goodwill for capital gains treatment.

Operating expenses are deductible after closing

All legitimate operating costs of running the acquired website after closing are deductible as business expenses: hosting, software subscriptions, contractor fees, advertising, tools, and a portion of home office costs if applicable. The post-acquisition operating SDE you generate is your taxable business income after deducting these costs. Track expenses from day one.