Is it legal using virtual currency in a swapping stuff website?


3

The site www.listia.com uses credits as a way to buy goods through auctions. These credits are not real money with the exception that you can buy more credits with real money if you desperately want to win an auction item.

From what I've read online there is no unequivocal stand about this issue.

Is there a difference between swapping stuff using only virtual currency(credits,coins,tokens...) and bringing in also real dollars?

As the owner on the venue, would you have to pay taxes on these virtual currency deals made in your site?

Would you think this is the gray zone where you a good lawyer to handle it?

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asked Jan 27 '11 at 18:46
Blank
Shir
51 points
Top digital marketing agency for SEO, content marketing, and PR: Demand Roll
  • What country are you in? What country is your server in? What other countries assert that they can tax you? – Mike Scott 9 years ago

2 Answers


1

What you are fundamentally doing is developing an alternative currency. There is a long and rich operational and practical experience in the development of alternative currencies. From "time dollars" to "points."

To quote from the linked wikipedia article:

Often there are issues related to
paying tax. Some alternative
currencies are considered tax-exempt,
but most of them are fully taxed as if
they were national currency, with the
caveat that the tax must be paid in
the national currency. The legality
and tax-status of alternative
currencies varies widely from country
to country; some systems in use in
some countries would be illegal in
others.

Back in the early '00s I was part of a start-up that created a companion currency which was earned by doing volunteer work in the community and used to purchase defined products from defined merchants. I was overwhelmed by how much money had to be spent to set up a legal framework which would navigate taxation issues in the five US states we beta launched. We had to address issues from sales tax to income tax.

We modeled ourselves off the "time dollar model" which the IRS had issued multiple local rulings were tax exempt. They have given three reasons for this status.

  1. An hour is always an hour, regardless of what is offered
  2. They are backed only by a moral obligation and are not legally binding
  3. Their purpose is charitable.

Our lawyers pointed out that since we made the exchanges legally binding via contract and that we were not a charitable organization (a 501c3 non-profit) even though we had a mission promoting the public good -- we were not exempt by the IRS rulings.

The IRS has specific regulations about the management of barter systems -- including how items are valued. In fact here is a link to the IRS page that covers the topic. Most of them make it clear that bartering is not a way to avoid taxes. I think that the barter exchange -- needs to file out a 1099-B for each person that has received a product or service. [Add that to your operational costs] (but of course I am not a lawyer at all on this and it depends how you configure your user agreements.)

Initially we avoiding addressing the issues (oops) only to have them brought up by legal counsel during our sales effort with major companies (oops). Anyway we lost a lot of launch time, and had to spend considerable costs to address these issues.

It would be great if someone could learn from our mistakes! :)

answered Mar 29 '11 at 09:06
Blank
Joseph Barisonzi
12,141 points

0

No grey zone. Any income is taxable unless stated otherwise (for example UK citizens dont pay income tax on betting profits).

If I get financial gains by your site, I have to report income tax according the regularions of my tax residence.

If you make money selling virtual currency, you have to report this as income.

answered Jan 27 '11 at 19:17
Blank
Net Tecture
11 points
  • Great advice! Lets say I don't make any money selling virtual currency. I only provide a virtual currency system to help users evaluate and exchange goods between themselves. From what you say I learn that since I as the venue owner gain no incomes from the virtual currency system, therefor I'm free of taxation. – Shir 9 years ago
  • But (if my understanding is correct) you can't sell the virtual currency for cash; all you can do is buy stuff with it in auctions on the website. – Mike Scott 9 years ago

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