Unlike most countries, the United States currently employs a “worldwide” system of taxation, under which it taxes all income earned by U.S. citizens and residents, regardless of where it is earned. “Nonresident aliens” pay taxes only on their U.S.-sourced income.
At first blush, one might assume that a “worldwide” system would not reach income earned in space, but the term worldwide is a function of a lack of imagination, not a limitation on the tax law’s reach. It could just as easily be referred to as a pan-galactic tax system. Indeed, in 1986 Congress made clear that any income a “United States Person” derives from a space activity should be considered U.S.-sourced—and therefore taxed in the U.S. Thus, any intrepid explorers who are U.S. citizens will be subject to American taxes on any income they earn on Mars. Moreover, this holds true whether they earn U.S. dollars or not-yet-invented Martian dollars, real or virtual.
Astute students of tax law might argue that these concerns are overblown because the law currently permits those living abroad to exclude approximately $100,000 earned abroad from U.S. taxes. However, this provision is unlikely to solve our problems. First, the earliest Martian colonists are likely to be highly skilled and therefore earn more than that amount, such that they will still be subject to American taxes. If nothing else, the publicity rights from selling their stories will be worth a bundle. Second, the provision allowing taxpayers to exclude income only applies to those living in a “foreign country.” Mars is not a foreign country, and it may be that all their income will be subject to tax. Martians could try to argue that they are “nonresident aliens,” subject to tax only on their U.S. sourced income, because they live on Mars. However, living on Mars—or even being born there—is unlikely to make them aliens for tax purposes, even if they acquire a green hue.
Editor's Note: Citizenship-based taxation is a horrendous policy that is only practiced by two countries in the entire world. For more on this topic see this IM article.