Tax Consequences of Virtual Transactions

May 6th, 2022

As social distancing turns convenience into a necessity, the number and types of activities moving to the internet are exploding. It’s important to remember that these virtual events often trigger real-world tax implications.

Here are some things to keep in mind:

  • Internet marketplaces – Proceeds of sales of goods and services on internet marketplaces can be taxable income. That’s true whether you’re a hobbyist or running an online business. Depending on your level of activity, tax rules may limit your deductions. Internet sales may also be subject to sales or use taxes, which vary by state. If the platform is considered a Marketplace Facilitator, it will collect the sales taxes and remitted to the appropriate taxing entities. In other cases, that responsibility may fall on you. So you need to know the difference.
  • The IRS is watching – New reporting requirements require more reselling activity to report to the IRS. E-bay, StubHub, Ticketmaster, and similar platforms must now report this activity to the IRS via new Form 1099-K reporting rules! So if you resell your sporting event tickets or concert tickets online, expect the platform to ask you for your Social Security number.
  • Online courses – Social media platforms have loads of advertisements for how-to classes on every conceivable topic – including how to create your own online course. If you decide to share your knowledge in a particular subject matter by developing and selling an online course, proceeds can be subject to income tax. Sales and use taxes may also be due on the purchases of these courses in some jurisdictions.
  • Crowdfunding – Your money can be taxable if you use crowdfunding platforms like Kickstarter or Indiegogo to raise funds for your business venture or project. If you provide a reward for different amounts, the funds become sales proceeds. Crowdfunding transactions may also be subject to state sales and use taxes. If backers of your venture receive equity in your startup company, the Security and Exchange Commission regulates those transactions.
  • Online fundraising – Funds you receive through an online fundraising campaign to pay for medical bills, disaster recovery, or other personal expenses generally are treated as nontaxable gifts. Donations to such campaigns may even qualify as deductible charitable contributions by the donors.
  • Social media influencers – It may seem fun to develop a significant following on social media, but capitalizing on that audience through product endorsements and other influencing activities is treated as business income. Endorsement payments are taxable, and so is the value of any products received in exchange for reviews or brand placements in social media posts.
  • Virtual currency – Payments you receive in the form of virtual currency for goods and services are similar to cash transactions and treated as so. They are included in your gross income at fair market value. But to add a level of complexity, virtual currency is also considered property, which can result in taxable gains or losses. So you will also need to attach the fair market value to that virtual currency as of the receipt date of the currency. Then when you use the currency, you will need to track a gain or loss on that future transaction.

Please call if you need help sorting out the tax implications of any virtual activity or transaction.