Most domain investors are very familiar with the direct cost of domain renewals but from experience, I find that many are not as aware of many of the other costs associated with running their business. It’s very easy to get so enamoured with the thought of selling one of your domains for a million dollars that you forget that time is ticking by and costs are mounting up.
There are two types of costs for any domain investment business. Direct costs are those that include, domain renewals, accountants, lawyers AND your time. I want to particular highlight your time as it’s often the forgotten or neglected cost.
Many domain investors have another job that puts food on the table for their families and they end up running their business more like a hobby. It’s fun finding domain names and making a few bucks on the side either through traffic revenue or selling domains but the question that all of us needs to answer is whether we are running a business or enjoying a hobby.
Let me be very blunt here. If you value your time at zero, then you aren’t running a proper business at all. You need to be tracking the number of hours you spend managing your domain portfolio and attributing an hourly rate for your time. As well as being prudent it will help you work out if your time would be better spent in some other activity rather than on your portfolio.
I’ve written about this before but I’ll mention it again. It may be more cost effective to outsource all of your domain management to external experts so that you can focus on other projects. For example, developing a domain into a profitable business.
Strangely, the other cost I would like to highlight that is often ignored by portfolio owners is tax. I should state up front that I’m not across the tax laws in every jurisdiction and I would highly recommend you seek your own professional advice.
That being said, if you buy a domain name for $100 and sell it for $1000 then you have a capital gain of $900. Not so surprising, most governments want a piece of that windfall.
Some investors have done some fancy accounting with their portfolio by burying these types of gains in offshore tax havens. I don’t know about the rest of the world but the Australian government is really cracking down on this type of behaviour and throwing around words like “fines” and “jail time”. Both are never good to be on the receiving end of.
I personally believe in legally minimising my tax but I also do whatever I can to be squeaky clean. If I have the tax book thrown at me then I want to know that I’ve made an honest mistake rather than tried to dodge an obligation. As an aside, there’s something pleasant about sleeping soundly at night knowing that I’ve paid my dues.
A number of years ago I was chatting to a major domain investor in the industry and the subject of tax came up. They calmly informed me that they hadn’t put a tax return in for the past seven years. I must admit that I didn’t know what to say as I pay my tax every quarter. The conversation quickly moved onto another topic.
If you don’t pay your tax, then your business has now become a ticking time bomb that has the potential to bury you in the future. I remember receiving a call from a domainer that was desperate to sell a portfolio because the sheriff was about to repossess their goods due to them not paying tax….never a good position to be in.
I’ve used an account since my first business over 30 years ago (showing my age here). A good accountant and lawyer for that matter are worth their weight in gold while bad accountants/lawyers can cost you everything.
I’ve learned that when selecting an accountant there are three rules which I apply:
1. They need to be prepared to understand my business
2. They are part of a firm (just in case the individual leaves).
3. They are absolutely ethical.
When dealing with accountants and lawyers always, always and I repeat always, share everything with them. The level of advice they provide can be greatly influenced by the information that you provide them. Don’t ever be embarrassed because you forgot to do something or potentially did a “questionable” deal…..these are people that are in your corner fighting for you. Tell them everything as it will be kept confidential.
In the next article I'm going to discuss what I do with my domains and renewals followed by many of the hidden costs in running a domain portfolio.
