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here's the scenario:

  • started an online software subscription product in 2008, the only product of the business.
  • business that owns the product is a single-member LLC (disregarded entity)
  • paid taxes yearly on profits, and as per previous bullet, no different from "supplemental" income (schedule c).
  • time spent growing and enabling the product was 'sheer' intellectual property and my personal time (let's say on average 15hours/week coding parts of the product)
  • sold complete ownership of product (not the business)... let's say for $80k

NOW, how do I determine how much of the $80K will be subject to taxes? The product was not the results of "capital expense" but rather my time. However, the product was the primary "capital/asset" of the business. Clearly, I shouldn't be paying taxes on full $80k but instead, is there a "cost basis" I can come up with for the product?

Tax Gurus - I would love to hear your thoughts on this.

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    Pretty sure you don't get to factor your own time/labor into cost basis. – BrenBarn Aug 12 '15 at 1:42
  • Hmm.. could be, but then remember the asset is "intangible", I'm and not sure if we can completely rule out time... and by time, one that correlates to what it would take a paid professional to develop... just thinking, I may still be wrong. – MarkGuru Aug 12 '15 at 1:48
  • See bit.ly/1h1nDVY, opening section and 'Assets Used in a Trade or Business'. – MarkGuru Aug 12 '15 at 2:11
  • That doesn't say anything about deducting your labor costs. – BrenBarn Aug 12 '15 at 2:20
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Tax cost basis is the amounts you've spent on developing the product which you hasn't deducted yet from previous income. From what you've described, it sounds like your cost basis is $0.

Time you spent is not your cost, since time is not money. The fact that you might have earned something if working at that time but you didn't - is irrelevant, because potential income that you didn't get is not a loss that you took.

Someone mentioned "intangibles" in the comments - that would be the line of thought of the buyer. However, since you didn't buy the product but rather developed it, you can only deduct the actual expenses you've incurred, that you haven't deducted so far.

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