There are many ways of making money as an online journalist – whether you’re producing content for someone else, blogging, or running an online news outfit in a virtual world. But where there’s money being made, there’s likely taxes to be paid. We turned to Daniel Kushner CPA, a partner with the Miami-based accounting firm, Gerson, Preston and Robinson, to find out whether there are tax issues especially relevant to online journalists.
OJR: Are bloggers legally required to report donations to a Paypal account, Amazon wishlist, or other similar fundraising vehicles?
Kushner: I imagine that what your talking about there is that someone has an online magazine in the public domain, and they ask that if people like it, maybe they’d like to contribute money to it to help sustain the publication.
OJR: Right.
Kushner: In that regard, the first issue is, is the person publishing that site doing it for profit motive? If there’s a profit motive, then yeah, of course, any money that they collect would be income.
Now, why do I say a profit motive? What do I mean by that? What I mean is that people sometimes make their hobbies their business. So there’s some tests for when a hobby becomes a business or when a business is really a hobby. If someone is doing this for profit, of course any money they collect – they’re a US person, of course it’s taxable, no matter where it’s contributed from. When I say US people, I don’t [just] mean individuals, I mean a US corporation, partnership, individual trust – whatever it is. A US entity is taxed on its worldwide income.
OJR: For an individual blogger, what is the test to distinguish between a hobby and a business?
Kushner: The way the tax rules are set up is that if your income exceeds your expenses, it’s generally considered a business. Here’s the problem — a lot of people will take their hobby and say it’s a business.
Let’s say I have horses. I own horses, I breed them sometimes, I have a lot of horse expenses. Clearly I like to ride them a lot, but I say I’m in the horse business because I breed them, and whatever it is. I collect a little bit in fees, and I have huge expenses, huge losses in my horse business. It’s almost like a tax shelter, right? If I’m going to do the horses, whether I say I’m in business or not, why not take advantage of the tax deductions and say I’m in the business? So a lot of people will take their hobbies and actually say they’re businesses.
Well, in different types of activities… you have to show a profit in a certain number of years. You can’t show losses every year. Either two out of seven or three out of seven years, you have to have a profit. And there are a lot of other tests. If somebody says it’s a hobby and they’re profiting, the government is going to say it’s a business! The government gets the best of every rule. They have the ability because they have the hindsight. They know what has occurred, and they’ll make the determination based on what has occurred.
OJR: So that means you really have to keep accurate records.
Kushner: That’s the thing. If somebody has a hobby, and they really keep accurate records, and treat in a businesslike manner, the government may agree that it was an attempt at a business, even if you have losses. So, if you’re going to have a business and have losses, you’re going to have to keep really good records.
OJR: When should owners of blog sites file 1099 forms for contributing writers?
Kushner: The rules are the rules. Whenever you pay somebody more than $600 in a calendar year, you’re supposed to give them a 1099. In theory, what you should be doing is before you pay them the first time, you should request a certification of their [tax] ID number. There’s a form, W-9. Keep that on file, in case the payments go over $600.
OJR: In recent years, news organizations have been setting up shop in virtual worlds such as Second Life. Some of these news outlets sell advertising and other products on the web and in-world. They spend money creating offices in world and sometimes stage special events. There has been some discussion about whether assets created and sold in virtual worlds should be taxable. [One journalist, Julian Dibbell, chronicled his failed effort to get an answer to the question in this 2006 article for Legal Affairs magazine.] Given the interest in Congress in taxing revenues generated in virtual worlds, are there things that people who start businesses in those sites should be doing?
Kushner: We have a definition in the tax code of what gross income is. Any time gross income is realized, it’s taxable. Whether or not it’s a profit that you also pay tax on is a different issue, but anytime there’s gross income, it’s reportable gross income. So if somebody receives something of value, or they had an increase in their wealth as a result of a transaction, then it’s considered taxable income.
OJR: Dan Miller, a senior economist for the House joint economic committee, told Reuters last year. that, “you can have a virtual asset and virtual capital gains, but there’s no mechanism by which you’re taxed on this stuff.” Your thoughts?
Kushner: Certainly, if a US person has created virtual wealth which they can exchange for any product or service, or exchange it back into some currency, then it’s reportable income. Under our tax laws, I don’t care what [Miller] says, that happens to be the definition of income, and it’s reportable.
OJR: They have a virtual currency, called Lindens, that can be exchanged for US dollars.
Kushner: If you can convert it back to US dollars, or to Italian lira, or to any country’s currency, at any time, then, all they’ve done is created another medium of exchange. And to the extent that your increase in net worth exists as a result of your exchanges, you have income.
OJR: Is it taxable at the point when you convert it to dollars, or when you acquire it?
Kushner: It’s taxable when the transactions occur. It’s no different than if I convert my money into British pounds, and I put into a British stock brokerage account, and I trade stock in the United Kingdom, and I make money in that account, trading stock. Just because I’m trading it in sterling, doesn’t mean that I don’t have income.
Now, if you buy assets in those currencies, it’s when you sell the assets [that it’s taxable.] It’s what you realize in terms of US dollars Let’s say I buy an asset for £1 million, and the equivalent in US dollars is $750,000. Then I sell it at a £1 million. But when I sell it, the equivalent is $850,000 US because the exchange rate [fluctuates]. I’d have $100,000 of income, even though the sales price and the purchase price was the same.
Now, let’s say I make $1000 in a virtual transaction. If I use that $1000 to pay my office rent and telephone expense and my internet hosting costs – I’m using it for business expenses, I get to deduct those.
OJR: The tricky thing here, is that if you don’t convert your Linden dollars, what you’re buying and selling are virtual assets, which in the real world are just 1s and 0s.
Kushner: But it’s whatever the conversion rate is for those dollars after your own currency. So if it’s dollar for dollar, when you have a closed transaction, you have to measure the value of the transaction in US currency.
[As of Jan. 26, 2007, one US dollar was worth 267 Lindens, according to Reuters’ Second Life bureau.
OJR: You seem to have a very clear position, but it doesn’t seem to be something that is settled in the eyes of the IRS. So what should people who are active in places like Second Life be doing?
Kushner: We have to talk about the difference between US people and non-US people. The issues would most likely be – and I’m only guessing because I haven’t read much about this – transactions [by non-US people] that are occurring within the United States, and whether they should be taxed because they’re occurring in the United States. But they’re not getting taxed because the participants might be somebody sitting at a keyboard in another country.
OJR: It has to do with people in the United States, too.
Kushner: I think the difficulty there is that they probably have no way of tracing those transactions, and they’re probably trying to figure out how to set up some excise tax or something like that. That’s the only thing I can think of, because income tax rules are clear. You have income when you realize the accession to wealth. What that means is that if you sold something for more than you bought it for, no matter what the currency, no matter what the medium of exchange, you have income.
I think people have to aware that what they transact online with virtual dollars, they have to consider just as they would consider transacting business a real bank account. They have to account for the income, and account for the withdrawals for personal use
OJR: Do independent writers who are given equipment and software for review have to report it? (Last year, for example, Microsoft gave laptops with their new Vista operating system to several bloggers.)
Kushner: There are rules that cover that. They’re called the barter rules. If Microsoft sends a computer to somebody and says, “We’d like you write a review of this computer for us, and you can keep it for your trouble,” they’ve bartered that person’s services in exchange for providing them a piece of equipment. A person has income to the extent of the fair value of the piece of equipment that they’ve received.
OJR: Suppose they don’t put it that way. Suppose they say, “We hope you’ll consider writing a review?” But you don’t have to agree to do it.
Kushner: And if they don’t agree to do it, they can just keep the computer?
OJR: Right.
Kushner: And it’s unsolicited? That’s a good question. That depends on the existing relationship between the parties. There’s a couple of different things here.
Let’s pull apart the transaction where somebody gives you a book and says, “We’d like you to review the book.” What they could have done is say, “Here’s $25, go out and buy our book and please do a review for it.” You have $25 income that they’re paying you, then you have $25 expense for buying the book. You’re at zero for that.
A piece of equipment is a little bit different. On my books, when I receive this piece of equipment, I’m going to record “equipment: $500,” and I’m going to credit “income: $500.” Now, I can depreciate that equipment, I can expense that equipment under certain expensing elections. So, to a certain degree, I can come out at zero on that, as well.
The question is, do they have something they’re supposed to report? The answer to that is, “Yes.” They have bartering income.
They should probably be recording the value of that piece of equipment on one side [of the ledger] and either the expense of acquiring that equipment, to do the work that they had to do, value it a capital asset, probably. But somehow, it would become something that they ultimately would get a tax deduction for, in most circumstances.
OJR: I suppose your advice to any one who has questions would be to talk to their accountant.
Kushner: Yes. That’s absolutely necessary. We’ve had clients with Internet businesses, and let me tell you, some of them make substantial amounts of money, and the reason we to them as clients is because in their initial planning, they never thought they were going to make the money that they’re making. So their initial planning was off, in terms of the type of entity selected. There are consequences to entity selection in terms of self-employment taxes and things like that. So planning is key, especially if you are really doing it for profit and you have the potential to make a large profit.
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