8:06 AM
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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:
Alto,
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.
Kind regards,
Nico
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).
http://www.irs.gov/businesses/article/0,,id=251966,00.html
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.
http://www.irs.gov/businesses/article/0,,id=251966,00.html
I can only assume that Capital Gains would fall into currency exchanges for overseas transactions. These are taxable in most countries.
http://www.irs.gov/businesses/small/article/0,,id=130524,00.html
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:
http://www.irs.gov/businesses/small/industries/article/0,,id=202939,00.html
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,
Alto.
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! =)
7 comments:
Thanks Alto, that is very useful breakdown for any US reader - however I think almost none of it applies to any non-US reader. Each country will have it's own rules & regulations, regardless of where that income comes from. The International Tax Treaties in place will ensure that a non-US person only pays tax in their own country so as you correctly advise at the beginning - get proper professional advice, it may cost a bit to start with but it will be worth it in the long run :)
In the US you don't need to LLC/incorporate to write off business expenses. The advantage of LLC/INC is to provide a liability shield, and some tax advantages (LLC prevents the double-taxation of both corporate and income tax if you have retained earnings.)
As long as the expense is tied to the income, it's deductible. The IRS does have requirements as to what qualifies as a business expense, but you certainly don't need to make 20K to write stuff off. Heck, if you're smart enough, you'll find enough deductions to reduce your income to virtually zero.
You are required to file with the IRS even if you only make $400. That's total - not just from Diablo. I'm not an accountant either, but I've been dealing with taxes for over 10 yrs now so I've got a pretty good feel for it.
Just a quick question: Does "5 digits" mean something different in Europe than it does here? Because here, I think most people would have that to mean tens of thousands of dollars. If this is true, maybe I should give D3 another shot.
Thanks for the comments Nev and Jon!
I just mentioned the LLC as that is how I was advised to start my business. As long as you are a business holder and have earnings, then you can deduct, and that is what my accountant told me as well....
Write off anything and everything that is an expense that relates to your business.
I was not aware the $400 limit...That will pertain to most folks that had sales via RMAH. The IRS will have it's hands full on this one, huh?
Alto.
@Tailswish
It just might be....either way. I look at 5 digits the same as you, 10,000$ plus. That's alotta change from clicking keys and a mouse!
Alto.
I'm doing something wrong, have only made 6 dollars... Guess I won't have to worry about claiming it in Canada.
Just a quick question: Does "5 digits" mean something different in Europe than it does here? Because here, I think most people would have that to mean tens of thousands of dollars.
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