Failure to report SL Income to IRS

I wonder how many people who make money in SL don't report their income. I imagine the number are fairly high. Which could be a big mistake because if they ever come looking for it, it will be very easy for the IRS to find out how much money you have taken out of SL. All they have to do is demand SL provide them with these records.

https://secure-web21.secondlife.com/account/statement.php?lang=en

All income from self employment or hobbys over $400 must be reported.
http://www.wwwebtax.com/income/hobby_income.htm
http://www.wwwebtax.com/miscellaneous/self_employment_tax.htm

I was curious what kind of penalties one would have to pay if you are a citizen of the USA and you do not report your SL income to the IRS. I'm sharing this information here as a public service to the community.

Interest, compounded daily, is charged on any unpaid tax from the due date of the return until the date of payment. The interest rate is the federal short-term rate plus 3 percent. That rate is determined every three months.

In addition, if you filed on time but didn't pay on time, you'll generally have to pay a late payment penalty of one-half of one percent of the tax (0.5%) owed for each month, or part of a month, that the tax remains unpaid after the due date, not exceeding 25 percent.

If you did not file on time and owe tax, you may owe an additional penalty for failure to file unless you can show reasonable cause. The combined penalty is 5 percent (4.5% late filing, 0.5% late payment) for each month, or part of a month, that your return was late, up to 25%.

Reference: http://www.irs.gov/faqs/faq-kw136.html

If you fail to report your income you may be found guilty of tax evasion.

"Any person who willfully attempts in any manner to evade or defeat any tax imposed by this title or the payment thereof shall, in addition to other penalties provided by law, be guilty of a felony and, upon conviction thereof, shall be fined not more than $100,000 ($500,000 in the case of a corporation), or imprisoned not more than 5 years, or both, together with the costs of prosecution."

Reference: http://www.law.cornell.edu/uscode/26/7201.html

I don't like income tax much but I do report my SL earnings and take appropriate deductions each year. I don't consider worth the gamble, and reporting the small income keeps me eligible for SS Disability should I ever need it.

Well, you know, if one earns income, one must declare it or face the consequences; the source is fairly immaterial. I do not believe that anyone serious would consider otherwise.

I agree, but I suspect there are many who don't know the consequences, they are more severe then I expected, so I thought I would share the information.

I don't make any money in SL, but I have been know to report income from self-employment for consulting work I do on a very occasional basis.

This year, I got a notice from the city I live in requiring me to obtain a $200 business license! When I complained that none of the work is performed in the city, and I don't maintain a home office, I was politely informed that I'm deemed to manage my business from my home!

So, depending on where you live, there may be even more consequences to running a business in SL. And the business license is not dependent on making a profit...

Just a little food for thought.

I've always wonder do you report the income on the lindens converted to RL money, or the lindens sitting on a server in non real form?

You are taxed on real money in the real world.

It is no income until it is "realized", paid out to you in the real world. For example, if you own a stock that is increasing in value, you do not owe taxes on your profit until you sell the stock and "realize" the capital gains. I report the income I receive from SL when they send me a check or transfer the funds to my PayPal account.

Anyone who wouldn't report their income from SL would a fool. Beside the fact that it would be highly illegal not to, it would also be pretty stupid.

One of my mentors when I started in business once said, "There's a big difference between tax evasion and tax avoidance. Tax evasion is not reporting your full income. That's bad. That's what they busted Al Capone for. Tax avoidance, on the other hand is good. Tax avoidance means taking advantage of your constitutional right to pay as little in taxes as possible. Aggressive deductions are what it's all about."

If you're running a legitimate business in addition to holding employment at a regular job, you can write off so much in business expenses, you could very likely end up paying less in taxes than you would without the business. As a business owner, you have so much more power to dictate how your money is spent than just as an employee. When you're an employee, you're taxed at a certain rate, and that's that. But as a business owner, you can spend that same money on actual stuff that benefits you directly, rather than on taxes that may or may not go towards paying for government programs you believe in.

That $3000 laptop you bought this year, that's now a business expense. Your taxable income is now $3000 lower than it otherwise would be. Your broadband bill, same deal. Your cell phone, chances are you can write off at least a portion of that bill too, if not the whole thing. Going on vacation this year? While you're there, talk about your business with someone. The whole trip is now a business expense. How about your electric bill? Yup. a portion of that can be written off as well. Same goes for your rent or mortgage. A portion of it is your home office, and is absolutely deductible. Going out to dinner? Talk about your business with someone at the table. You can't write off your own meal, but you can write off 50% of everybody else's as an entertainment expense. And of course, that $200 business license that Allegria had to buy would be 100% deductible.

The possibilities are practically endless. Just keep good records so you can back up your claims in case you ever get audited, and you've got nothing to worry about. And of course, talk to an accountant if you're not sure about anything.

The bottom line is this. Don't just go out on a spending spree because you can write stuff off. That wouldn't make any sense. But if there's something you're going to spend money on anyway, find a way to make it relate to your business, and then you can write it off.

Again, aggressive deductions are what it's all about. Was your date last night really a business meal? The aggressive answer is yes, it was. She asked you what you do, right? You told her, right? Could she be a potential customer? Absolutely. You weren't just on a date; you were entertaining a prospective client.

And did you have to drive to get there? Guess what. You can write off 48.5 cents for every business mile you drive.

As I said, the possibilities are endless. For more, consult a good book on taxes for small business, and then decide how aggressive you want to be.

I'm not going to report what I'm earning in SL. If they want to arrest me and throw me in an SL prison I'm prepared for my avatar to do the time.

It sort of non-existant point because only small percent of residents in sl even make money.
I spend more then I earn and I am still irl living below poverty levels.

More importantly, can I claim my tier as a deduction?

I'm not a tax expert. And I'm not a credit expert.

But I am in a position to see how taking too many deductions for business expenses can cause credit difficulties.

Here's what I've seen: Joe Businessman gets his entire income from his business. He writes off almost all his living expenses, because he works from home, drives a company car, makes business calls on his cell phone, etc. At tax time, he makes out like a bandit.

Joe's accountant is a genius. Or maybe not.

Now Joe needs a new credit card or a business loan. He applies for credit and is denied. Why?

Because his business doesn't make any money. Joe is living the good life, but his financial papers are those of a pauper. No one wants to give him money, because his business isn't profitable.

Just a note to those who are primarily self-employed. Taxes aren't the only consideration, important as they are. If you want your business to be taken seriously, be prepared to have your books reflect that.

We now return you to your regular chaos.

This is the first year I will be reporting my SL income on my taxes. I haven't even FILED tax returns for the last 2 years, because I have been EXCEEDINGLY BELOW the poverty line. At the point that I've been making much MUCH less than 500$ per month. (well below the rate for taxable income.. since I've had no other income).

This year, I have to file a return, because my grandmother died and left me a life insurance benefit (which is taxable). So adding that in to my SL income, I'm probably going to owe some tax. Which is fine.

This is true, VAT is an example of this, find someone inworld who rents land and you can avoid paying VAT as they are not required to charge it in most circumstances, Linden Lab on the other hand have crossed the threshold and charge VAT.

Some forms of tax avoidance however end up with governments filling the loophole, it's all am matter of degree.

As for when it's realised, I don't know anywhere in the world that as of yet considers Linden dollars to be taxable, although I'm sure lots of places would like them to be.

Do we own Linden dollars? I mean if for some reason your account is banned are you entitled to cash out, because if you aren't then I can't see how they could ever be considered taxable at that point.

I know it's probably different in various parts of the world, but where I live, the banks have started to recognize that self-employed people are very tax-efficient. They now look beyond the 'taxable income' on your last return, because they are coming to understand that it's not a good or accurate barometer of a self-employed person's credit risk.

Five years or eight years ago it was a lot more like you described - banks and creditors seemed to think self employed == unemployed, because the 'taxable income' tended to be so low compared to what they were worth.

-Atashi

its your money, and your hard earned cash, fuck anyone else mate, maybe the law is different, here i don't have 2 tell anyone shit unless its over £3,500 or something

if somone tried 2 take my hard earned money i'd go absolutely nuts!!

I think you are mistaken about this. Any good business person should take advantage of every legal tax shelter that they can. And any competent credit or loan manager is going to know this. Sheltering your business income with legal deductions is good business.

Yes, clearly if you earn below the minimum level where filing an income tax return is required, then you need not report your SL income.

@ Spark, it may be a small percentage of residents who make a profit, but that number still amounts to thousands of people (I estimate 6,000+/- after tier*). And the numbers reported in the SL Economic Statistics* do not include all of the land barons who receive rent payments outside of SL or the businesses on SLExchange who cash out directly from there.

*PMLF http://secondlife.com/whatis/economy_stats.php

Interesting, that varies greatly by location. My local and state government does not require any such thing except for certain specializations, barber, engineer, food preperation, etc.

You might want to check into what the regulations actually say and consult an attorney if you have any doubts. Whoever it is that you communicated with may be wrong. Like you I find it hard to believe what you were told, unless the address you use for your business is in the City. It seems odd that they even became aware of your activities.

Of course, one could argue that any income from Second Life is winnings from gambling on a game of skill. Do you pay taxes on gambling winnings in the USA?

Not that that argument improves your situation any, given that online gambling is also illegal.

thats about how it is here in the U.S.
if you earn so much or so little determines if you really need to file or not..if i made say 5k in one year would be close to getting where you need to file..anything lower i wouldn't bother..they are looking for bigger fish not the poor..

it doesn't hurt to file .i mean you may get something back in refund but if they know you are not going to be paying there is no reason for them to come after you..

i had to go back 7 years on our compnay when they did an audit one time and we actually ended up pulling around 800 extra in 5 of those years and had returns coming from the first two years .the reason we did not was because after 5 years the refund limitations run out..
the I.R.S does not have the power they used to but if you are converting a lot of money in a year to rl cash i would be reporting it or they will show up..

the reason we were audited was because they actually lost 7 years of our filings somehow..so with the crap book keeper we had..i ended up refiling 7 years worth of taxes lol
the I.R.S doesn't scare me but their interest they get if you can't show zero or have something coming back does when under an audit

If you have another job or a spouse you file with and your RL income is above the level to file, then you have to file all income. Even if it is $50 from a hobby.

As for the business licenses, many areas require the self employed to buy them.

Conan, yes gambling winnings are taxable in the US. But you can deduct gambling losses up to the amount of your winnings. You can't deduct the losses if you don't have gambling winnings.

As for the IRS looking for bigger fish, not true. The poor tend to be audited quite often, especially if they claim the EIC. But then I have seen large amounts of fraud on EIC claims. Always from a young single mother who comes in and claims to have babysat, braided hair, sold pies, etc, for the exact amount of income that gets her the biggest EIC payment allowed. She never has any business expenses and very little documentation on her "business". This has tightened up a little, but not near enough. Sure they take out FICA taxes but she still gets a pretty heft check for not doing anything.

Senga, you're absolutely right. My post was more aimed at someone who's using their SL business as a secondary income, not their primary. If you're already gainfully employed, and you have a side business, aggressive deductions can be a great way to lower your tax liability.

But if your ONLY income comes from your business, you might want to be a little less aggressive. If you don't show a profit in three of any five years, it sends up a red flag to the IRS, and you're likely to get audited (which isn't necessarily a problem if you've kept careful records, but is certainly a pain in the ass, no matter what). It's definitely not a good idea to claim you've been losing money hand over fist while you're driving around in your new brand new Jag (which you would have had to pay cash for, since as you rightly pointed out, your credit's gonna suck if you show no income).

Keep it reasonable, and above all, keep it honest. Absolutely don't make any false claims for expenses. The idea is simply to find ways, if you can, that things you might buy anyway can relate to your business, so that they can become deductible.



Absolutely. That's a 100% legitimate business expense. If you're going to business in SL at all, you need to have a presence there. Any money you spend in order to have that presence is part of your cost of doing business.



I would disagree, FD. If you're spending more than you earn, then it's super important that you write off what you're spending. Otherwise you're effectively spending the same money twice: once when you spend it, and again when you pay income taxes that would have been significantly lower had you deducted your business expenses.

If you're really living below the poverty line in RL, then it's even more important. You need to keep every penny you can. You certainly can't afford to pay any more in taxes than you absolutely have to.

Let me throw some numbers out at you. If you're a single person living in the continental US in 2008, the official poverty line for you is $10,400 in annual income. Let's pick an easy number below that, and say your income is $10,000. If I'm doing my math right, your federal income tax on that would be roughly $1100. That's money that goes straight to the government if you don't have any deductions.

Now let's throw your SL business into the mix. I have no idea how much you're earning and how much you're spending on it, but again, let's make up some easy numbers. Let's say you make $1000, but to do that, you spent $3000. So you're $2000 in the hole. If you don't deduct that amount from your taxable income, it's just gone, and that's that. But now let's say you do deduct it. Instead of paying tax on $10,000, you'd only be paying it on $8000. If my math is right again, that would mean that instead of handing Uncle Sam the full $1100 this year, you'd only have to fork over around $800. So five minutes of paperwork to include a Schedule C (statement of profit & loss from business) on your tax return just saved you $300!

Since you're spending the same amount on SL whether you deduct it or not, that $300 in tax savings is just money you're throwing away if you don't deduct your expenses. With that in mind, it's simply ludicrous, not to mention illegal, not to declare your P&L from your SL business.

Even if your particular numbers are a lot lower than the ones I made up here, it's still important. Whether you save $300 or $3, it's still worth it.




I'm afraid I don't know very much about European taxes.

But as to the question of do we own Linden Dollars, the answer is no, we don't. Linden Dollars don't even really exist. They represent a feature of the Second Life service, not any real currency. The fact that people are willing to pay for the privilege of accessing that feature doesn't change what it is. If you stop using the service for any reason, you're not entitled to any kind of cashout.

Not showing a profit after a certain number of years ( I am too lazy to look it up) also removes the ability to claim deductions from that business. The business becomes a hobby and the income is reportable without business deductions.

That's not necessarily true. You may be required to prove that you're honestly trying to make a profit is all. And if you are, you're fine. Just because your business happens to be going badly doesn't mean it's not a business.

Again, be aggressive, but be careful, and be honest.