Taxes: An evil necessary seen through the eyes of a gaming professional | Part 1
September 28, 2018 | Adam Osborne
As a certified public accountant, I get the pleasure of working with several gaming professionals who are always looking to understand the tax code. The gaming industry has different specialties. We have those who game live and those who prefer to do everything online. Expenses are different in both, but reporting requirements tend to be the same across the board. In part one of the two part series, I will answer questions I am routinely asked by gaming professionals about foreign earned income exclusion and foreign bank accounting, as well as highlight some of the changes that will impact 2018 and future years tax filings.
Foreign Earned Income Exclusion
On April 15, 2011, the online gaming industry was rocked by an indictment of key executives issued by the Department of Justice. This day would become known in the industry as Black Friday and would change how online gaming professionals would do business in the coming years. Many professionals fled the country and live outside of the US borders. A key tax item for those still residing outside of the country to consider is the Foreign Earned Income Exclusion. To qualify, the gaming professional must spend 330 days out of the country during any defined 365-day period. This income exclusion went up 2% in 2018 from $102,100 to $104,100.
With the Tax Cuts and Jobs Act, many are expecting drastic changes to the Foreign Earned Income Exclusion in 2019. The Trump administration is encouraging a move to a citizenship test, which says, if you are only a U.S. Citizen, then you pay U.S. taxes with no exclusions, however, if you are an U.S. Citizen, living in another country where you also have citizenship, you can avoid U.S. taxation by proving you pay taxes to that country.
Foreign Bank Account Reporting
Continue to be mindful of the need to report any foreign bank accounts owned individually or jointly. These accounts include bank accounts, brokerage accounts, mutual funds or trusts.
Online gaming accounts are no longer considered foreign bank accounts as a result of United States vs. Hom ruling by the Court of Appeals for the Ninth Circuit.
Civil fines for failure to report foreign bank accounts keep increasing annually. For 2018, non-willful failure to report could receive a fine of $12,921 per account and a willful failure to report could result in a fine of the greater of $129,210 or 50% of the balance at the time of violation.
For example, I have four accounts, which I did not know had to be reported and I failed to do so. If investigated, I could be fined a total $51,684 for non-willful failure to report.
Now let’s say those four accounts, each have $100,000 in them and I knowingly did not report. That fine is now the greater of $129,210 or 50% of the total balance. In this scenario the fine would be $200,000.
Not reporting can be very costly and those in the gaming industry could be scrutinized differently than other professions when determining if it is considered willful or non-willful failure to report such bank accounts.
Consider all accounts and discuss with an HHM financial advisor whether they should be reported.