I recently sold the internet domain and business I had developed over a two year period. It's arguable whether the value of what I was selling was primarily the domain name itself or whether it was the business and the small revenue stream the website was starting to generate. Can I declare the sale as a capital gain? If so, what do I call the purchase price? (the $8 registration I intially paid?). Or do I somehow add up the assets of the business which I sold? Or do I have to declare the business sale as regular income? (it was not incorporated in any way).

I need an answer for both US and Canadian taxes as I have to file in both countries.

With the sale of any business, your basis in the business is determined by adding the value of the assets of the company. The sales price less your basis would then constitute your gain on the sale of the business. If you have owned the business for more than a year, then it will be considered a long term capital gain. This applies for the US, and I assume that it would also apply to Canada as well.

Why not? go ahead.

You mentioned that it was a business. It depends what kind of form of the business was that. like, corporation or sole prop.

If it was corp. than you will simply withdraw all the accumulated E & P as ordinory income and rest will be capital gain.

If it was partnership than it get tricky. You need to prove IRS that the intent of the investment in the domein. If it was treated as asset at the begining ( capitalizing 8$ registration fees ) than it can be treated as capital gain but if you has that 8$ reg. fees as expence than you got ordinary income.

Its more complicated that that. consult the tax advisor.