Are You Making Money With Pokémon Go? The IRS Is Watching!
Pokémon GO has been downloaded an estimated 30 million times since its release on July 5 with more daily active users than the mobile versions of Pandora, Twitter, and Netflix . Millions of users every day log in and attempt to catch different types of Pokémon, ranging from Pidgey to Charmander to Squirtle and, of course, the most recognizable Pokémon, Pikachu.
Last month, I touched on the Pokémon GO phenomenon. You can read that article here.
The amount of money being spent is mind-blowing with millions of dollars being generated every day. Nintendo, which controls one third of Pokemon, has seen its stock value double and because of the way iPhone charges users, Apple is said to be in a position to make billions. Not surprisingly, entrepreneurs are looking for ways to crack the Pokémon GO market, too. Here are a few ideas generating interest:
- Drive: One cab driver in Mexico came up with the idea of driving customers around to help them “hunt” for Pokémon. Emilio Cacho, a 29-year-old cab driver, started calling his cab “Poketaxi” after offering his services to players. Mr. Cacho, who charges by the hour as a “Pokémon hunter”, has received more than 20 calls since he got started. BUT WAIT! Do you want to hear the irony? Cacho doesn’t even play the game, saying, “I don’t even know how to play, but I downloaded the app to help my clients.” And Cacho isn’t alone – there’s also a Pokémon bus.
- Walk: You don’t even have to be a cab driver to earn extra cash You can just use your feet. You can take a user’s Pokémon GO account for a walk. Those users that are too busy to catch creatures on their own or maybe don’t want to deal with the heat are willing to pay. Ads are showing up online like this one on Craigslist in Houston (will walk for $15/hour).
- Write: If you’ve figured out all of the best spots and strategies for catching Pokémon, why not share your expertise? You can write your own “how to” guide to help new users figure out the game. You can post your tips online via the web, newsletter, or eBook to sell or monetize.
- Make a Video: If writing isn’t your strong suit, why not share your expertise? “How to” videos are popping up online every day telling users how to find the best creatures, what to spend money on (and what to avoid), and master tips. Monetizing those videos with ads can bring in extra revenue.
- Promote: Small businesses have figured out that advertising Pokéstop locations can be a great advertising tool: attaching specials to Pokéstop locations can bring in new customers. Some businesses are even using lures (you have to buy these) to attract Pokémon to woo customers. New ideas for promotion are constantly bouncing around the internet. The possibilities are practically endless.
If you’re hoping to pick up some extra cash in the Pokemon GO craze, here’s what you need to keep in mind from a tax perspective (Oh, you didn’t think it would be that easy…….did you?):
- Income is Income. It doesn’t matter if your extra income is from walking Pokémon accounts or investing in the stock market, income is reportable unless it’s otherwise excluded.
- Understand What’s Business and What’s Just for Fun. Income may be income but how it’s reported can vary depending on whether you’re engaged in a business or a hobby. Hobbies and businesses are reported on differently on your Federal Income Tax return and they are treated differently for purposes of self-employment tax (business income is subject to self-employment tax while hobby income is not). When it comes to deductions, if you earn income in the pursuit of a hobby, you can offset the income with deductions but you cannot claim deductions that exceed your income – there’s no loss for a hobby. So if you spend more than you make, you’re out of luck. If, however, you earn income in the pursuit of a business, you can not only offset the income with deductions, you can carry any losses forward or backward. These rules are sometimes referred to as the “hobby loss rules” and they are important. To distinguish a bonafide business from a hobby, the Internal Revenue Service (IRS) looks at a bunch of different factors including whether you expect to make money (if so, you’re typically a business) as well as whether you are actually making money (again, typically a business). So how seriously you treat your new pursuit will matter. For more on distinctions between a hobby and a business, click here.
- Keep Good Records. It may seem like all good fun when you’re chasing a Pikachu, but you want to be able to verify your income and your expenses. The best way to do this is contemporaneously. If you’re working by the hour, keep a log of your time. Save your invoices and document income. When it comes to expenses, keep receipts and describe the nature of the expense (you can write this right on the receipt, or use a scanner and upload the image with an explanation). But, don’t get rid of those receipts immediately after Tax Day. You can read an article from our blog describing how long to keep your tax records by clicking here.
- You May Need to Prorate Some Expenses. Typically, you can only deduct expenses that are primarily for business use. Sometimes, you may have items like your cell phone or your car that are used for business and personal reasons. When it comes to those expenses, all is not lost. You can typically deduct the business portion of the expense. To figure that out, you’ll want to document your use and note when it’s for business. The easiest way to do this is to keep a log of your time and mileage. If, at the end of the year, you find, for example, that 30% of the use was for business, then you can typically deduct 30% of the expense. Some exceptions apply (for example, the IRS always considers a primary home landline personal, even if you jump up and down all the while swearing that it’s used solely for business). And, be careful, cars can be tricky.
- You May Need to Make Estimated Payments. The extra few hundred dollars you earn from walking or ad revenue might not drastically affect your tax bill, but if you’re making a significant amount of money, you’ll want to plan ahead. If you expect to owe more than $1,000 at tax time from your extra efforts, you’ll want to make estimated payments. Estimated taxes must be paid quarterly: if you skip a payment or pay late, you may be subject to a penalty.
- Consider Hiring a Tax Professional. Don’t assume that hiring a good tax professional will be complicated or expensive. If your tax situation becomes more complicated from your side business, especially since all of your income will no longer be reported by your employer on a form W-2, you may need help. Don’t hire just on cost.
Sometimes, a side business is just that. But if it turns out to be something more, don’t ignore the business side of things.
Bruce – Your Host at The Tax Nook
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