The Tax Man Cometh

What do you mean, my taxes are not prepared?

Greetings from the Lawbringer! It's mid-April, which means beautiful weather here in Kansas City, frantic studying for my last round of law school finals, my church's triannual world conference, and tax season. In an attempt to be seasonally appropriate for our American readers while incorporating that whole World of Warcraft bit, I'll be describing how to report any income to the IRS you have received by selling gold or power-leveling services.

First, I must make a confession -- I HATE tax law. I was required to take a class in federal tax law by my law school, and I spent those hours laughing at my professor's really bad jokes and writing short stories about a zombie tax attorney. (I remain eternally thankful to my professor for giving an open note, open book, multiple choice final.) Suffice it to say, take any comments in this column with a grain of salt, preferably one big enough for a graduation party's worth of margaritas.

So you've decided to sell gold or power-leveling. We've already discussed how it's against the End User License Agreement and Terms of Use and may even be a felony under the recent interpretations of the Computer Fraud and Abuse Act. But having done so anyway, you need to know that you are still liable for that income under the tax laws.

Taxes for a Self-Employed Gold Seller

We'll start by noting that you are required by law to report all income. Any income you make selling gold or power leveling will likely be considered self-employment. (If you are somehow working for a company paying you to sell gold, they should give you a W-2 and this won't be your problem.) As most US gold sellers appear to be hard core gamers making a little money on the side, this is self-employment.

The self-employment tax rate is 15.3%. This is 12.4% of old, widowed, and disabled people tax (aka Social Security) for the first $106,800 of your yearly net income and 2.9% of poor sick people tax (aka Medicare) for all your net income. In addition to self-employment taxes, you are required to pay regular federal income taxes (and state income taxes too, if you don't live the nine states awesome enough to not have state income taxes.) These numbers are readily available, but the most likely numbers to apply are those for single taxpayer. A single guy will owe 10% on the first $8,350 and then 15% on what's left up to $33,950.

Filing

Because the US is a pay-as-you-go system, you may be responsible for making quarterly estimated tax payments. To estimate how much you should have paid last year (or should be paying this year), fill out this worksheet. If you expect to owe $1000 or more for the year's taxes, you'll need to make your quarterly payments, or you'll get slapped with $100 failure to make payments fine. You'll need to make $6,205 to owe $1000 or more in taxes, so it may be a legitimate concern.

Even if you aren't required to make quarterly payments, you are required to file a return by April 15 if you net more than $400 in a single year. As a sole proprietor of your gold selling business, you should fill out Schedule C-EZ, if you've made less than $5000. If not, prepare to whip out your calculator and slog through Schedule C which comes with its very ownInstruction Manual. This is in addition to the 1040 or 1040EZ that you have to file.

How Much?

Now for the question we all want to ask -- how much will this cost me? Answer: it depends. (Tip for aspiring law students: nearly every question you are ever asked in law school can be answered this way. To pass though, you'll need to explain why.) For the average Joe, you'll be paying the 15.3% unemployment [self employment] tax no matter how much you make, unless somehow your gold selling revenue is over $106,800. In which case, we need to talk. :)

If you earn less than $5,700 as a single person, you'll owe no Federal income taxes, as the standard deduction will bring your taxable income down to zero, and only $872.10 in self employment taxes. Keep in mind -- these numbers aren't taking into account the millions of deductions and tax credits and other behavioral modification incentives known as the rest of tax code. Have a house? Different answer. Qualify as dependent for your parents? Different answer. Drive a hybrid vehicle? Different answer. If the Secretary of the Treasury and the Chairman of the House Ways and Means Committee can't figure out this stuff, you certainly shouldn't look to me for definite answers.

Deductions

I should note that the income numbers in question are "net" numbers, meaning that various deductions can be made to reduce the taxable income. This where the possible illegality of gold selling comes into consideration. Recall that under the government's interpretation of the Computer Fraud and Abuse Act in US v. Drew violating the Terms of Use of a website is a crime. The judge ruled under normal circumstances it wasn't, but that violations for money, such as gold selling, may be felonious under the law. Now, normal costs of running a business are deductible, even for businesses involved in illegal activities, Commissioner v. Tellier, 383 U.S. 687, except where allowing them would sharply frustrate national policy. Examples of the latter include bribes, kickbacks, and expenses related to selling illegal drugs, the last being specifically prohibited as taxable deductions by 26 USC 280E. Yes, strippers can deduct the cost of their implants and junkyard owners the cost of cat food for strays, but drug dealers can't deduct the costs of related to selling cocaine. What a country.

Might the costs involved with selling online goods -- internet service, game subscription, computer or electricity -- be considered "sharply frustrating" to public policy? I seriously doubt it, though I could see an attempt to argue gold selling as such in order to demand a heavier fine in addition to the jail time prescribed for the felony. A number of states have levied sales taxes on marijuana for a similar reason.

Bartering

Some of you may be thinking, "I don't have to worry about this; I power level or sell gold, but only to my buddies in exchange for a TV or a Starbucks(tm) run." One cannot escape income taxes by simply not transacting in cash -- you have received something of value for your service, and so you technically owe income and self employment tax off the fair market value of that beer run. Again, you don't have to file if it's less than $400 of net income.

Foreigners

I was not able to get any good information about whether a non-resident non-citizen operating over the internet might have any US tax liability. (Read, awesome professor mentioned above didn't know and the irs.gov site didn't have it in an obvious place.) So the Chinese gold farmers are probably safe from Uncle Sam, though I'm sure Uncle Mao wants his cut.

Well, I hope this has been an interesting investigation into a weird little intersection of law and Warcraft. Stay tuned next week, when we begin a new series on copyright law.


This column is provided for your entertainment and is not legal advice. If you have a real legal issue, contact a real lawyer. If you are interested in law school or just want to shoot the breeze, email me at lawbringerjd@aol.com or tweet me @wowlawbringer.