I have owned a very small internet business for several years and sold it in Feb 05 for under $6,000. I file 1040 each year. There were only two types of assets - books sold to customers, and the website content including customers names, forum, and information abaout business.

How do I report this sale at tax time?

My first question would be, if you sold it in 2005, should you not have done the taxes in 2006 (this PAST year)?

My apologies... time goes by too fast. I sold the business in 2006

Check with the IRS, and see if you are allowed some tax-exempt capital gains, or if capital gains are taxed at a lower rate than is regular business income. It may well be that the whole amount, due to the fairly small sale figure, is exempt.

Case #1: Capital Gains Taxed at Lower Rate than Regular Income, or at the Same Rate

Report the capital gain:

($6,000 less the cost of the books that were still in inventory at the time you sold the business.)

Case #2: Capital Gains taxed at Higher Rate than Regular income

If in your country regular income is taxed at a lower rate than capital gains, and if you have not yet filed an income statement for the regualr business for 2005, you could include the amount you got (from the person who bought the business) for the books in regular income, and the cost of the books as a regular expense.

If the agreement of sale did not break down the amount which was for books, just put them into regular income at your usual mark-up, and of course include the cost in your expenses for that year. You should also make up a pro-forma invoice for the books.

This could be dickey, except that the amount is so small, no one would bother.

If you have already filed a return for 2005 for regular income, you could drop the IRS a line and ask them to revise your last return by the amount of the sale of books and their cost.

The the remainder of the $6,000 is capital gain.

(P.S. I'm Canadian. There may be a few little differences in terminology, but the principles are the same. The rates of tax for regular income and capital gains are no doubt different.)