You might remember the post D3 RMAH Auction House- Taxes, IRS and You! that I wrote a few weeks back. Well, so did this reader:
I've read your posts about taxation of virtual goods and some stuff about the RMAH of Diablo 3, which were quite interesting and opened my eyes.
I'm currently making alot of cash (5-digits/month) with it and never had to pay taxes before, as I am a student and not working part time or anything. I'm from Germany, so I hope tax laws will be somewhat similar.
There are still no certain answers if taxes have to be paid right? Can I get into deep trouble (jail time?) if I don't report that income? When do I have to report and pay taxes usually?
I really hope you can give me some advice on this matter.
Well Nico. First off, congratulations! I would recommend you talk with a tax professional first, or even speak with your parent/accounting professor/tax advisor. I am none of the above, but I can explain a bit of what I know with ebay/internet website laws here in the US (which, if you use paypal, is expected taxes in most countries via virtual goods and import/export laws).
At the end of the fiscal year, PayPal will report your 'payments' or records of monies 'made' in a tax form, 1099-K (or 1099-MISC). You should receive this at your PayPal account address by February of the next year (in this case, 2013).
This is where it gets confusing, as I stated above, you need to see a tax professional.
If you have made over $20,000USD and over 200 transactions, you are required to be taxed on this income.
I can only assume that Capital Gains would fall into currency exchanges for overseas transactions. These are taxable in most countries.
Now if you have made over this $20,000USD, then you can/should incorporate as a business (even a LLC would be better....). This way, your 'business expenses' such as your computer/upgrades, internet fees, computer desk, streaming fees, youtube costs, computer chair(s), pens, pencils, paper, even food expenses (with receipt from a restaurant-if you talked 'business' with someone) can be wrote off as a business expense. Even the gas/fuel used to go purchase D3 can be used, and don't forget about your schooling costs, if they pertain to your business (online classes as well).
You can find more through the IRS website on Small Businesses here:
Once again, I have to state that I am not an Accountant, so take this info with a grain of salt. Last year I did claim internet/virtual good sales on my taxes, and I will this year as well. My best advice? Hire someone that knows these laws in and out. They will be able to advise you better on your specific situation.
Best of luck,
P.S. There might be someone that reads this who has more information specific to overseas transactions, maybe they can comment and help out! Yes, I am talking about you! =)