Who hates paying taxes? Everyone!
Yes, even me, and I’m a tax accountant. If you want to be as tax efficient as possible, please read below.
How does Magic relate to taxes? Why is the tollway I drive on everyday not free? How does paying taxes affect you? If your first reaction to these questions is, “well, yeah I play Legacy and I hate playing against Death and Taxes!” then you are definitely a Magic player.
(Trust me, I have Death and Taxes built in Legacy, and Vryn Wingmare and Sanctum Prelate are the real deal. The Wingmare is like Thalia number 5-8, but nonlegendary. Fair, I guess. Sanctum Prelate is like Chalice of the Void on a stick, meaning it can attack and deny your opponent the ability to do, well, anything. Totally sweet but unfair card. But I digress; you are reading this for my knowledge in tax law, not Magic. But wait! I have both for you today!)
For all of you who want to familiarize yourself with the scary kind of tax that everyone is forced to pay, I am here to help. Before doing any important paperwork, or making big financial decisions, it’s always best to consult a professional like me. Yes, they can be expensive, but trust me: It is worth it. Unless of course you strangely enjoy reading the IRC (Internal Revenue Code) on tax law, as I do.
I should preface this article by saying no assurance is provided and my word is not the absolute law. I am not a lawyer, but I am an accountant; however, I am not your accountant, so don’t roll the dice on your specific situation by treating this article as the only advice you need.
Magic is more geared toward adults, meaning you have consequences for being an adult now. Now that I have established we are all adults, we are responsible for having the knowledge on taxes and what our freedom actually entails.
- If you make more than $10,300, then you must file a Federal and State tax return. Some states you don’t need to file, because they don’t charge state income tax.
- The IRS has a lot of power; they can do anything from garnish your wages to levy your house and retirement accounts.
- If you sell online, you must charge sales tax to the end user if you have a nexus in that state.
- If you have a business, contact me because it’s the right thing to do.
- Revenue minus expenses equal net income! Simple, right? Did I lose you yet?
The No. 1 question I get regarding MTGfinance is definitely: What is deductible?
The IRS website would probably say, anything directly related to the selling of your widgets. Jordan, what about postage to put on your envelopes? Yes! Gas to go to UPS? Yes! Travel to Las Vegas for a Grand Prix? Well … Yes! Your steak dinner in Las Vegas? Yes! Your massage for having a rough day? Maybe!! My real answer would be it depends. Depends on what kind of an entity you are, depends on how aggressive you want to be, and depends on your income levels. Depends on if you are Person A, B, or C, which I will explain below.
Person A (like me) has a full-time job, plays Magic once a week or so, and dabbles in finance and speculation. He trades his Battle for Zendikar lands for fetches because he knows they will be worth more over time. He sells a bit on eBay, TCGplayer, and buylists for extra cash. This is just a hobby. Tax wise, I don’t report anything. I don’t make enough money in my hobby to report my income to the government. I didn’t get a Form 1099 (must receive over $600 from a single source) from eBay, so the IRS has no record of my income. No harm done, minimal hobby income.
Person B plays and invests in Magic daily. He has a rather large inventory that he keeps track of online with websites like MTGprice or Quiet Speculation. He makes a reasonable income to pay his bills and lives simply. No problem. He would be a sole proprietor (or a DBA, Doing Business As) and have to report his income on Schedule C on his personal tax return. He can list some business expenses (travel, meals, internet bills, insurance, etc.) to offset part of his income, but he still pays Self-Employment tax (15.3%) on his income for the year. I probably wouldn’t want to show $500 of income and $987,654 worth of expenses. That is begging for an audit. Speaking of, did you know that the Schedule C is the most audited Schedule by the IRS? Is this still considered a hobby? Yes, but now it’s also now a real business.
Person C is the smart person who contacted me privately for advice. He started his own corporation (The S corporation is very popular right now!) and called it John Smith Loves Children’s Card Games Inc. He files with his state and claims the business name. The cost is around $700 initially if you do it in Illinois (with me of course) or similar enough in most states.
You register for payroll so you can give yourself reasonable compensation. You only pay payroll taxes on that compensation you decide to give yourself, and therefore save on the self-employment tax. You still pay personal income taxes on your personal return, but over time, the S corporation is the way to go.
As far as getting a Form 1099 showing your income from PayPal or TCGplayer, you need to have more than 20K in gross income for them to report it to the IRS. But, technically, anything over $600 should be reported on a Form 1099. So If I sell a single magic card for $950 on TCGplayer, I should be receiving a Form 1099 from TCGplayer to me. And by me I mean my Social Security Number. This is not to be confused with a corporation. If I work for StarCity Games, and I sell the exact same magic card, TCGplayer doesn’t have to send me a Form 1099.
Having a business can be more profitable, but more work. It would definitely require some professional help for payroll, sales tax and corporate tax return filings. In the long run, you save on taxes if you hire someone like me (and my accounting fee is tax deductible anyways). Hobby? No. Business? Yes!
How to decide which person are you? It’s actually more based on your revenue and net income. I am not going to give exact figures because they change for each person. Starting a corporation can be very rewarding tax-wise. To keep track of your S Corporation, most people use QuickBooks as their software. If you don’t know where you fall — think of it as a matter of time spent. Do you spend your full day doing this? Is it profitable? Keep in mind profit triggers a tax. Always. If you made money, Uncle Sam wants some of it. Do you spend all your money on mostly business expenses or inventory? The more, time, effort and cash you put into it, the closer you are to being person C not Person A.
One quick thing to note, regardless of whether you make you living with Magic or not: The IRS will never call you. They send letters through the mail. They ask for your signature through the mail. You send your tax returns through the mail. They send your refund through the mail. The government owns the United States Postal Service (USPS). See the correlation?
Very rarely have I seen the IRS call a taxpayer directly. About the only time would be if they set up a phone call with you and your power of attorney in a very rare situation like an audit. And the IRS definitely won’t show up at your door and take your lunch money. They are way too busy processing mounds of paperwork and answering their IRS hotline phone number.
It is absolutely vital to keep good records. That could mean your Articles of Incorporation when incorporating, or even just a spreadsheet of your inventory. Don’t spend more than you are willing to lose. Businesses fail, and that’s something you must be prepared for.
No matter who you are, there are some small things you should be doing consistently. Reconcile your bank statement. This means matching your records to the bank’s records. What if the bank stole from you?
Keep track of your spending. Why did you spend $300 this year on postage but last year only $250? Did your sales increase by the same margin? Why or why not? These records can be on a spreadsheet, in QuickBooks, or even just keeping your receipts. Store every receipt in your wallet for a month. Then, look at your bank statement and compare the receipts to what the bank charged your account. I bet you 4x Liliana of the Veils that either you spend less money next month or you catch a mistake by your bank or your own records when reconciling. Keep tax records for a minimum of 7 years. Watch your employees for theft. Read a How-to book.
Don’t be afraid to ask for help — even Steve Jobs needed help creating the iPod. Stick to your strengths. Mine is definitely tax accounting. What is yours?
Bonus #MTGfinance advice: For long-term speculation, I really like EMA rares and foils, even with more EMA product coming out recently. Look at the Mother of Runes foil for example. The foil from the Urza’s block was and still is $35-40. Now the EMA one is $20. I say buy now, put them under your bed, and wait for the EMA one to catch up. Even the nonfoils are too cheap. I bought a set for $1 each. $1, people! Breaking my bank here. Before they were reprinted they were around $4-6. Patience, my young padawans; this is a long-term hold.
Jordan Pollack is a Tax Accountant and Magic player from suburban Chicago. He holds an accounting degree from the University of Kansas and is currently pursuing CPA certification. He enjoys watching the Blackhawks and doing manly things like fixing a leaky sink, grilling, and making sure his girlfriend has everything she needs (and wants).