The answer to the question of whether online gaming will affect your tax liability may seem like a straightforward one. After all, most money that is earned or won is subject to taxes, and online winnings are no different. However, there are a number of complications associated with taxes and online gaming.
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Online Gambling and Tax Deductions
Many people may not realize that they can claim gambling losses just as they would a business loss. People can only claim as much as they have won. Any amount above that is simply a loss. Furthermore, in order to make that claim, a number of complicated records must be kept.
The IRS does not have specific rules in place about online gambling, and some people may assume that because they were gambling on a site that is located in another country, it is not necessary to pay taxes. This is not the case. It is best to assume that taxes should be paid on any winnings. It might be best to contact a tax expert to make sure this is done is correctly since tax liability and online gaming is a complex and unclear area of tax law. Despite these caveats, paying taxes on gambling winnings in an online casino is a relatively straightforward process compared to what is involved with other types of online gaming.
Imaginary Worlds, Real Money
Some online role-playing gamers enjoy their hobby so much that they are willing to pay a lot of money to gain an advantage in a game. Some people are willing to spend hundreds or even thousands of dollars picking up a sword, a shield, a magical object or some other important virtual item on eBay or other sites. Even though these items are not real, the transactions are, and the people who make money on these kinds of transactions are obligated to pay taxes on them as they would on any other items they sell online.
This becomes more complicated when IRS laws about barter income come into play. A writer and gamer was interviewed at NPR about this very subject. Under standard IRS barter law, bartering for goods and services does not exempt either person from taxes. Therefore, people who offer goods and services in-kind must technically pay taxes on the worth of those goods or services. The man visited an IRS office and spoke to the business specialty line to discuss how this translates into people in an online game trading objects such as a sword or a shield. After a long talk with colleagues, the person he spoke to came back with the answer that this is technically taxable. However, the IRS has no official ruling on this, and it is unclear what is expected regarding taxes and online gaming in this situation.
Cryptocurrency in Online Games
At least one online game in development, VoidSpace, will use a cryptocurrency, and this will be taxable. If other gaming companies follow suit, gamers may find themselves having to track their entertainment and filling out more complicated tax returns in the years ahead.
Outside of a few clearcut cases, this issue is a complex one. The best solution for someone concerned about online gaming and tax liability may be to speak to a tax expert or even to the IRS.
