I am a US citizen. I wrote an open source program many years ago, and just recently have sold the code and IP rights to an Australian, who will be wiring money to me soon in the amount of $25,000 US. Will I be taxed on this? Do I need to report it? This wasn't a project for hire, and developing software is not my primary or usual income- he basically just wanted the IP rights and the code itself, so he bought it.

Thanks!

Based on the information provided, you essentially sold him a product which you developed.

That, In my opinion, makes it a sales under a business that must be reported on Schedule C, with self-employment taxes as calculated on Schedule SE.

Yes, you do have to pay tax; this is a taxable event.

Unfortunately, you cannot treat this as a capital asset (see Pub. 550, p.48)
http://www.irs.gov/pub/irs-pdf/p550.pdf
Since, I assume, you sold the copyright.

Since this is not a business that you conduct on the side you would not have to pay self employment tax. I would put it on line 21 of Form 1040 as "other income" and write a brief explanatory note on the bottom of the page.

Thank you both for such fast replies.

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Originally Posted by Five Rings

Since this is not a business that you conduct on the side you would not have to pay self employment tax. I would put it on line 21 of Form 1040 as "other income" and write a brief explanatory note on the bottom of the page.

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Is there any way you could give me a guess as to how much I would end up owing for receiving this money if I reported it in this manner? I'd like to not be shell shocked and have some put away for this purpose. Does it depend on which tax bracket I'm in, or is this a separate affair?

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Originally Posted by AtlantaTaxExpert

Based on the information provided, you essentially sold him a product which you developed.

That, IMHO, makes it a sales under a business that must be reported on Schedule C, with self-employment taxes as calculated on Schedule SE.

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Thank you very much for your reply. With the amount of $25k, I deduced the following- does this sound right?

If the amount on line 4 is: $106,800 or less (which it is), multiply line 4 by 15.3% (.153)

Which is $3,825.

Deduction for one-half of self-employment tax. Multiply line 5 by 50% (.50)

Which is $1,912.50. Would this be the amount that I would expect to pay from the total of $25,000 for taxes?

Would this save me more money than claiming it on a 1040?

I will not contest Five Rings treatment of the sale, as there are arguments for BOTH of our contentions.

Filing the return the way Five Rings stated WILL result in a lower tax, so declare the $25,000 as "OTHER INCOME" on Line #21 of Form 1040.

As to how much the tax will be depends on your overall income level. More than likely, the federal tax will be either 15% or 25%. You should make an estimated tax payment of $5,000 by filing Form 1040-ES.

Also, you probably have a state tax liability as well.

Thanks very much. I live in Tennessee so I don't think the state will come into play. I appreciate your answers.

I would consider this "other income" with certain provisos, to wit:
1. You did not chase around the world trying to sell this program.
2. You do not have an enterprise with a fixed base (like an office at home) where you write code for many applications and then try to sell them.
3. This was just a happy single occurrence where you were contacted by the buyer and offered an acceptable price for the sale of your property.

This is what I understood the circumstances to be from your question.

Quote:

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Originally Posted by Five Rings

I would consider this "other income" with certain provisos, to wit:
1. You did not chase around the world trying to sell this program.
2. You do not have an enterprise with a fixed base (like an office at home) where you write code for many applications and then try to sell them.
3. This was just a happy single occurance where you were contacted by the buyer and offered an acceptable price for the sale of your property.

This is what I understood the circumstances to be from your question.

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You understood me perfectly. All three of those points are accurate and valid.