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Let's say I started a new social media company, which collects and sells it's users' data. To entice people to use my social media site, I give them a cut of the money that I get from selling that user data.

Let's put aside financial viability and other practical concerns.

How legal is this? Would this be in line with data protection laws in the United States? Should the money be taxed as income (treating the users as independent contractors), or something else?

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  • I'm voting to leave this open. The question asked is very broad in nature that I do not perceive this as being posted for a specific real world issue, but rather to understand something about both data protection and tax law (which is what the answers seem to provide). Commented Oct 11, 2023 at 21:07

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If everyone involved consents adequately, this would be legal (assuming, of course, that the data isn't being collected as part of a scheme to defraud the users).

The United States has few data protection laws (and those are mostly at the state level). None of them prohibit consenting to share data for a fee.

This would generally be taxable ordinary income, although there is room to split fine hairs over whether it is as independent contractors or is a royalty on the intellectual property of the users (which would matter for purposes of the self-employment tax imposed in lieu of FICA taxation on self-employed people).

A royalty treatment (which would not be subject to self-employment taxation) would probably be more correct than an independent contractor treatment, since this is a payment for intellectual property that belongs to the user and not a payment for work done by the user or goods sold by the user.

It might be possible to structure this as a rebate on the membership fees for subscriptions to the social media site if there was one.

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