Dumb Tax Question

I’m now making some significant money on Themeforest, but I only “withdrew” about 10% of it in 2010. For tax purposes, I only report the money that I withdrew, right?

I’m only wondering because theoretically if I make $1000 on TF, I could spend all $1000 on Envato products, which is essentially like me not paying any tax on the $1000. But if I withdrew the $1000, i’d have to pay much of it in taxes and wouldn’t be able to spend all $1000. So this makes me wonder if I have to report all earnings whether or not its withdrawn.

Hope this question makes sense!

I’m not a tax specialist or anything but I would say that the funds would not be considered income by the IRS until it enters your bank account. You should only report income over $600 so if you received $1000 from Envato in your account last year, then that’s all you should report to the IRS .

@JamiGibbs – If in the whole year he received a total of over $600? Haha US is crazy, here in Serbia i need to report the money only if in the whole year i got more then $15K Go Serbia And i might not even report it then

haha theres actually a new law their trying to pass that is you “spend” more than 600 dollars on something you have to send a tax form(this goes for bussinesses only not personal) theirs some other goofy parts to it but until it passes I dont care

Your balance is considered as credit therefore it is not considered income until you withdraw.

Brandon wrote up a nice article if anyone else is looking for information on my least favorite subject ever, taxes.

http://blog.themeforest.net/general/extremely-important-tax-rules-for-freelance-designers-in-the-united-states/

You don’t pay taxes on money not yet in your possession.

cramdesign said
You don’t pay taxes on money not yet in your possession.

That’s almost exactly what my CPA told me. As soon as I have access to the money it’s taxable. You’ll have to interpret “access” for yourself.

I think you might compare this to credit card reward points. If you get points and use them to buy a $5,000 holiday you don’t report an additional $5,000 of income because they were “points” not dollars (or another nations currency). However, if you win a car or other large prize it’s considered income and you will be expected to pay taxes. I would ask your tax “guy”.

This may be related to Envato’s decision to switch the naming from $ to “points” last year.

On another note, are you insane! Leaving your earnings in the marketplace is about the worst thing you can do with your money. At the very least transfer it to PayPal and sign up for their money market account so you can earn some interest on it. Seriously, you are doing Envato a big favor by just letting that money sit there because they’re probably earning interest on your money every month. Even if they are not doing this, I don’t recommend leaving the money unclaimed for extended periods.

Thanks for the replies everyone. Very helpful. So one could spend 100% of their earnings on Envato products and never have to pay taxes! Would be cool if Envato sold electronics!

And yes, I should transfer my earnings out of here. Will do that today.

On another note, are you insane! Leaving your earnings in the marketplace is about the worst thing you can do with your money. At the very least transfer it to PayPal and sign up for their money market account so you can earn some interest on it. Seriously, you are doing Envato a big favor by just letting that money sit there because they’re probably earning interest on your money every month. Even if they are not doing this, I don’t recommend leaving the money unclaimed for extended periods.

+1000000