Question concerning selling stuff for L$ and the taxman

I'm still confused about LL and the current rulings on 'administrating' SL for a RL company.

I can consider all my L$ trades and US payouts/purchases as the only 'real' transactions I do, and put those in the books. Considering L$ are not 'real money' any L$ transaction can not be considered a RL money transaction, so it has no place in administration/tax forms.

On the other hand, there are rulings about 'barter systems' in current tax laws, where 'intrinsic value' which is bartered between parties, still needs to be registered and taxed. In a world, based on anonymity and micro transactions, this is a virtual impossibility to perform or administrate.

My question:

Do people who do business from a company entity in SL only administer and tax declare their RL transactions (L$ sales/payouts/ L$ purchases) as business tranactions. Or do you administer and declare every single L$ transaction?
Or is there some middle ground between the two to use?

In the UK (can't speak for anywhere else) there are various schemes allowed to assist smaller businesses account for VAT without the overhead of fully tracking every single item. Known as "Retail Schemes" I believe. There would probably be something similar in your administration, I would think

Inc

Personally I only view the RL transactions.

When I sell L$ on the Lindex, I consider the proceeds to be my Sales / Revenue.

When LL takes their fees from my account or from my credit card, I consider that to be my costs/expenses.

The difference between those two are my profit or loss. I have a simple accounting spreadsheet I use and I typically have 4 or 5 transactions per month. In another thread, someone referred to this as a 'black box' analogy and the name works well.

I do of course maintain a more-detailed monthly accounting which is all calculated in L$, showing all the ins and outs, but of course these are all anonymous micro transactions. I do not believe it would be feasable, possible, or practical, to try and apply various tax laws at the L$ level because the amounts tend to be small and the custom tends to be anonymous. You have no way of knowing that a patron may be subject to one set of laws or the next.

From a tax point of view, if LL were operating in Canada and charging GST, they would legally be required to indicate their GST number on every invoice and invoices would have to show the GST as a separate line item on any invoices over $200 in value. Further, I would be required to charge GST on all my sales, which I consider the L$ sold via the Lindex. I would need to have LL provide me with at least the names and nationalities of whomever bought my L$ so that I would know which ones I have to charge GST. This is the law here; if you're registered to collect and remit the sales tax, you can't pick and choose when to apply it (that's the Government's job).

Although LL maintains that the Lindex is just a service allowing residents to trade L$ among each other, the way it does things anonymously means either the Lindex would have to be changed, or LL would have to accept that they 'facilitate' the transactions by buying L$ from the seller at a 3.5% discount, then selling to the buyer for a 30 cent markup. In which case LL would themselves be on the line for the GST / VAT on those transactions that involve a tax-registered seller.

Indeed, when I look at my "Account History" page (which is what passes for an Invoice with LL, isn't it?) I see money going out to LL and money coming in from the Currency Exchange. Nowhere does it indicate that these transactions are with anyone other than Linden Lab. If I were to show this to an accountant, I suspect they would conclude that the only entity I am transacting business with is Linden Lab.

Again this is all just my speculation based on what I know of the GST laws in Canada. I hope very much I shall never have to worry abou this stuff with SL / LL because in the end, it just costs everyone more money and only the taxman wins.

-Atashi

I think you can only do it based on rl transactions. Legal issues aside, the accounting associated with L$ micropayments would be a fulltime job for any business of reasonable size in itself!

What you do have to be sure to do is that all outgoings are paid for with rl money too. So that means rather than using US$ balance obtained from selling L$ to cover tier, you need to pay the tier with rl money. This of course isn't an issue for those who are not VAT registered, as it all comes out in the wash anyway, but it's something that needs to be considered by those who are.

I'm all for making accounting as simple as possible!

Basically - what Atashi said.

I used the black box concept as the only sane way of dealing with transactions that are completely internal to SL.

There are issues to for a proper audit trail in the accounts.
We need to have a legal form of Pro Forma invoice from SL that can be matched to the individual payments to LL via the credit card.

For Credit Process transactions, we need to raise a matching Pro Forma invoice on LL. That invoice should be raised on LL in the USA to avoid the complications of UK companies invoicing LL as their UK base. UK companies would have charge VAT to LL-UK unless LL-UK had exempt status.
I wish I knew precisely what legal entity we are dealing with for financial transactions. I'm assuming LL-USA even thought the actual processing of the payments has been outsourced to some UK-based business. Our credit card statement simply references "Second Life".


Conversion of L$ to US$ via the LindeX can only be treated as Credit Notes or Sundry Credit from LL. LL apply any US$ balance on the account before raising charges on our credit card.


As the VAT amounts on all these transactions will be 0, the question of different VAT rates for on different types of purchases from LL (subs and tier v. L$ purchase) is neatly sidestepped. That's certainly a potential issue for non-VAT-registered users and for LL.


L$ transactions are not currency transactions. They have no place in company accounts.
The identity and residence of the other parties in the L$ transactions are unknown.
There is no way of tying individual L$ transactions to the US$ amounts appearing in the SL Account.

"So that means rather than using US$ balance obtained from selling L$ to cover tier, you need to pay the tier with rl money."
No can do I think. The US$ balance is automatically applied by LL. Other than arranging to have a zero US$ balance at tier payment time, there is no mechanism to control this.

Yes that's the only way you can do it really. I wouldn't have thought that would be a problem for those who do not have many billing dates for tier, but for those who do, it will be a little more of a task.

As advised by my business accountant, in my jurisdiction.
I pay state and local income taxes on the net proceeds.
Funds withdrawn from SL, minus, funds deposited.
If the number is positive, I pay the appropriate state and Federal income tax, as earned income
If the number is negative, I write off the amount as “marketing”.
I use the cash accrual method, and proceeds are calculated on a quarterly basis.
YMMY

So Beautifully simple.

Sometimes we tend to read too much into things.

There's the cash method and the accrual method, but I don't think there's such a thing as a cash accrual method.

You're probably using the cash method.

The most likely situation that would make the IRS take a close look would be if you accumulate a very large number of L$ as profit and don't cash them out to postpone the taxes.

It would seem that (according to other replies on this forum in different threads) that if you were based in the US that you dont pay any tax on sales until you sell to someone in the EU (aparantly US residents dont pay sales tax on internet products).

Here in the EU, we have to pay tax on any "profit" we make - so if you keep L$ in the "game" it does not count, but as soon as you cash out, you wound need to pay income tax on any profit you make.

Of course, you can exchange your L$ (an currencly that alledgedly does not exist) for $ and pay your tier fees etc, but you are stil chatges VT on this "virtual currency" that LL state does not have a monetry value.

Gomez

Thanks for the answers.

I agree on basically only maintaining a balance of RL money going into SL and money coming out of SL. The following issues exist though:

1. Accruing large sums of L$ or US$ on Linden Accounts. This money is officially still Linden Labs, so it makes it possible to basically 'move' money from one tax year to another, where it can be more convenient to put it on the tax forms. 'Normal' financial institutions have to report your balance to the tax office. This is a way of hiding money. I guess the US$ 'credit' balance in should be reported though. Is this comparable to 'store credit', and what are the rules of reporting these?
I guess to prevent any confusion, it's best to keep your US$ balance as low as possible then.

2. VAT (again). By using a SL US$ balance, and paying (tier) costs from this. There is no actual money transaction. (Does LL also calculate VAT over these transactions btw? If so, how is this possible as no actual money changes hands... or is LL a financial institution?)
I guess the 'store credit' rule goes for this too...

3. Paying people for work with earned L$. This falls into the barter system category, and should 'officially' be taxed for VAT for European residents. Except it doesn't show up at all in the RL transaction balances.

I assume it's perfectly possible to just 'not bother' with these details, as i doubt any tax office in the world is capable of handling the intricate details of a large scale 'virtual' economy in combination with a US$ 'account' which is registered nowhere. Officially though, none of these actions are currently 'legal', if there is no clear registration of these transactions or deposits.

It's also a way of money laundering, although LL's financial records of resident transactions makes this not too safe a way for the criminally minded. And yes, the US$ balance would be reportable I think as it's a RL asset.



It may be an SL US$ balance, but it's still a US$ balance... there IS a money transaction between you and LL. I think (without re-looking) that the blog says tier etc is taxable for EU residents, no matter how the money is derived.



It would if you cashed out. Until that point it remains "virtual" and thus non-taxable

Inc

Once the game tokens come out of the black box and become hard currency, you could be seen as using SL as a bank. That could seriously alarm your auditors and the taxman.
The only sane tax points are the US$ transactions between your account and LL. A US$ balance can be explained by the transactions, but the presence of a US$ balance is a can of worms waiting to be opened by an auditor or a tax inspector



I think that LL should raise VAT on the entire tier amount. The US$ to pay for this come from your credit card and or whatever US$ balance you might have.
If LL simply apply VAT to a nett value, it would be a strong invitation to the taxman to investigate the activity within SL that is impacting the VAT take.
If they don't collect VAT on the full tier amount, I'd say that we are heading into a minefield.
I'll refrain for predicting what LL will do. I'm trying to remain upbeat.




These people would not be your employees. They are subcontractors.
It would be their own responsibly to be tax-compliant.
*If* there were any VAT implications here, it would be their responsibility to collect and VAT applicable and to supply you with a VAT invoice.
But again, L$ isn't a currency, so we can't possibly have VAT transactions in L$.





LOL! The real danger is that a tax office would *attempt* to handle the intricate details.

However, even to handle the US$ transactions for our SL account, we do need a standard of documentation (PDFs would do nicely) from SL that is legal and more detailed than the current memo Transaction History.

I think what it comes down to is that no legislator who ever had to draw up tax legislation ever imagined anything remotely resembling SL ever existing.