What tax do you pay if you cash out?

Ok I'm confused about which tax applies here if you cash out. I assumed it would come under income tax but having just read a news story it appears (in the UK anyway) that it's capital gains tax we're dealing with:

"Patrick O'Brien, a spokesman for HMRC said individuals were free to make profits from trading through games such as Second Life, but would have to pay tax on gains which were greater than their annual capital gains allowance of £9,200."



I mean the article isn't the best piece of journalism as they think Anshe is an American but the point is have people in the UK actually gone through this? Does this mean I can take £9,200 a year out of SL without paying any tax at all?

I would expect that your SL income would be included with any paid work that you do.

ie if you have a part time job paying £6,000 a year leaving £3,200 from SL before you pay tax.

If you have a full time job paying £15,000 a year you should pay tax on every thing you take out of Second Life.

In practice, however, most people's "profit" from Second Life is so miniscule it's not worth them or you being worried about. After all, if I find 50p on the street should I declare that and pay tax?

When I am making more than £1000 a year profit (after deducting my tier costs, account fees, contribution towards internet costs - an essential "business expense", etc) then maybe I'll talk to the taxman. Until then, they can go whistle.

Broccoli

I think that the HMRC guy was a victim of this Land/Asset ownership thing.

Income Tax is the only sane approach to a net cash outflow from SL.
SL income comes from
- Sales of inventory items, or copies thereof, that you create
- Sales of inventory items, or copies thereof, that you bought / got_free from someone else
- Rent collected
- Gifts
- Land trading
- Services rendered
- Stipend (you own money back from LL)

Taxation based on the type of inworld activity is the road to madness.

Capital gains tax allowance is a separate tax allowance. Your wages have nothing to do with it.

I had assumed that any SL income would be included with my paid work too.

I know for a fact that Paypal sends tax info to U.S. members, at the end of the year, so if you cash out that way, it is reported. It think it's the same form that employers send independent contractors, and they have to report their paying you, so there is a paper trail.

Having gone through the websites on CGT I think I have worked out what it all means.

If you have a business in SL and are cashing out profits from rent or items sold, then that would attract income tax. If you own land in SL it would be an asset. The CGT would be any profit you made on it, say you purchased for £1,000 and sold it for £2,000 at a later date, the CGT would be based on the profit made £1,000). You would have to own a lot of land though for the value to exceed £9,200, though those with multiple islands could be looking at having to pay up if they decide to leave the game and sell up.

Reported to the US IRS -- not clear if PayPal is doing that outside the US, which is the situation that Ciaran is in.

It's interesting - it looks like they would expect any money coming out of SL to be split into income, which would be subject to income tax, and capital gains, which are subject to GCT instead.

Also, it's worth pointing out that the UKP9,200 is your capital gains allowance for each year. That means if you sold shares or a second home* in RL for a profit, the profit you could take out of SL (that isn't income...) without paying GCT would be less.

I actually think if this were properly codified, it would all be treated as income.

*Your primary residence is exempt from GCT

I think the absolute wisest thing to do is not to take advice from anybody on a forum when it comes to tax - if you have any doubts, you should contact a tax professional who knows your local laws.

Last year I pulled out a little bit. I went to a tax preparation service, can I mention H&R Block?, nahh better not. I may get in trouble for nameing names.

However, They processed it as a personal business. They were actually a bit confused as to how to handle it but figured that would be the best way. They then started carving up my percentage of time on SL for business and deducted my cable costs accordingly, and a couple others.

Disclaimer: I am not financially knowledge, asking me for change is enough to make my head swim. So take it from me, You do not have to pay taxes, just wait long enough and others will figure it all out for you. Minus a house, car, computer, ohh and freedom, don't forget that.

Do the right thing, ask a tax professonal, they know what to do, and hey, if they don't they at least know how to hide it.

It's not at all clear to me that the rental of virtual "land" is equivalent to purchase of a capital asset. My take on it would be that it's all income, not capital gains. Definitely, consult a tax professional.

Agreed.
'Logically' our rentals of virtual land to which we have absolutely no title should not be trested as capital assets.

However ....
In my country, the tax authorities treat things like license fees for software packages as assets for Corporation Tax purposes only.
If I buy a copy of Windows Xp, or Office I have to write it down against Corporation Tax over a number of years, exactly as if it was a PC.
Just to complicate matters, the PC is a Fixed Asset on the Balance Sheet, but the cost of the software package is in the Profit and Loss.

The Tax Authorities are comfortable with this concept because PCs and Software packages are everyday items.
I'm happy to wait for virtual land to become an everyday item, and for the taxman to have some idea how to deal with it.
Right now, my SL costs are equivalent to and lumped into general Internet costs.

So yes, if in doubt, and particularly if the amounts are anyway significant, consult a preofessional.

It baffles me why people would take advice on legal matters on a forum that has nothing to do with legal matters.

I know the best advice would come from a tax professional, the person quoted in the OP is a tax professional! HMRC run taxation in the UK.

I was merely asking if anyone from the UK had actually been down the capital tax gains route, it seemed an odd path to go down to me.

I am no tax professional, far from it. What it is appearing to say is that in the UK, there is an 9,200 exemption for capital gains. So that means that if your total (SL, stocks, bonds, etc.) capital gains are less then that exemption, you won't be taxed on it.

There are also 100s of other factors that could or could not place your earnings from SL into a capital gains type situation. That is why you need a tax adviser to answer the question. If taxes where simple it would be a simple answer, but every situation is different. What may hold true for someone else may end up landing you a very heavy fine.

When faced with a professional who might not actually know what they are on about, it may helpful to point out to them that VAT is being charged on LL purchases on the basis that you are paying for a Service provided from outside the EU and consumed within the EU.

If the Capital Gains section want to get a bite of the cake, maybe it would be better to make them fight their own VAT section for it

PS: And when they discover that VAT isn't being charged on LindeX prurchases, do run as fast as you can and hide behind the very biggest professional tax advisor you can find.
Keep your eyes closed and Don't look! I have a feeling that things might get nasty.

All the UK people are paying too much tax as it is.
Do what we did, get a boat load of tea and throw it in the harbor. It did wonders for us.

Estate tax if you're leaving for good.

Ohhh English dilemma.....lower taxes or dump the tea.......*Cake...or death..*

Arguably, all the US people pay too little... how much exactly does the US owe in dues to the UN? (ya ya I know there's little to no relation between the two)

And I bet you didn't pay for that tea before you polluted Boston harbour either....



Inc

The UN will get it's dues when they pay New York City for all their diplomats' Traffic Tickets. Even then they'll still be ahead of the game for the nuisances they cause.

I might also add that there's also paying for the London (traffic) Congestion Charge... never mind parking tickets. The US claimed diplomatic immunity, so they get to use the roads for free... and of course everyone else thought "ooo what a good idea, we won't pay either".

And I note the deafening silence on who actually paid for that tea.....

Inc

Add Up what you have Paid to Be in SL over the Last year (You have already Paid Tax on that Money) Subtract that amount from the RL Value of Money you have Taken Out of SL. If the Result is Negative, or Break Even, Don't Bother. If the Result is more than $0.00 Declare the amount on your Income Tax Form under the Column "Income from Other Sources", and Include your receipts, and Invoices as Support.

Angel.