Tax Questions

If I had $1.00 for every time I called the IRS, asked them a question and they told me they didnt have a clue, I would be a rich woman.

One thing that you need to be careful of is that if some one were to actually take the time to audit your taxes and they asked you "how much of this would you consider business and how much was pleasure. That is where I think any major problem would lie.

I would just do the best that you can do. If your sl expenses are anywhere near your income then I would put them both in... If you were to write off a room in your house as an sl business office it has to be used for that purpose and that purpose only, so I would suspect that writing off any computer hardware or LAN must be the same. Used for your business alone. This is so much different than a regular website, I am betting the IRS wont even look at it. It you have made a ton of money, then most definitely put in both your income and deductions. Then try not to worry about it, if there are any problems let the IRS figure it out. They wont put you in jail for making a mistake, they only do that if you try to cheat them.

I don't know if what I said makes any sense or not, but I want to wish you good luck honey and just try not to worry about it.

I'm kinda hoping that's how everyone does it. I'm sure it's still counted as income even if you keep it in your SL account since it was converted to USD, whether or not you turn it into a check. Or do you only count what ends up in your PayPal account?

Most small business are set up on a "cash" basis, so you may want to. If you do it that way, just remember next year to deduct any amount that you carried over into 2008.

If that is the case, make sure that you put in all of your expenses too. My accountant used to work for the IRS and he always told me, you have to deduct it before they can allow it. So if you don't know for sure "deduct" it.

Here's how it breaks out:

Sales in Lindens in SL - IRS not interested (YET!)
USD in your SL account - IRS not interested (YET!)
Payment transfered to you through PayPal or by check - IRS very interested*

*once the amount goes over $600 a year.

I'd still advise *extreme* caution - do your own research and do it well for *your* personal situation. Even giving advice here to others on the matter is... not wise. You can't really know what sort of activity people are doing on the grid to make money.

This is precisely the kind of 'tax advice' thread that can get people in trouble.

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This forum has a horrific track record for getting to the bottom of financial matters accurately.

Inworld 'banks' - it was embarrassing how many people lost the virtual shirts off their backs - but many forum users here were active users of these. Some still are (amazingly).

Gambling... the issue was talked to death, and vast numbers decided it was just fine, but the wakeup call eventually came from our service provider.

Euro VAT... the issue literally blindsided most people. A classic example of how tax-clueless anyone was for even a painfully obvious tax issue, until the rubber hit the road.

The last thing you want to do is base your tax reporting on what someone else here thought was 'okay'.

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Incidentally, I banned sexual ageplay and gambling from my regions long before the Company banned it gridwide.

Nobody leapt up and said "gee Des you were right, my dozens of forum posts were total baloney and I misled hundreds of people about gambling! Everyone, I apologise!!!" when those gridwide bans were finally enacted.

Instead, all the proponents of that stuff sort of mumbled annoyed disagreement and shuffled off. That's the kind of support you'll get from anyone who steers you wrong on a tax issue, too. Nobody here is gonna pay your fines if you take their erroneous tax advice.

Find a professional with a clue, and good luck.

Aye there's the rub. How many tax professionals have SL experience? --And I live in California! I could visit the LL office (a few hour's drive) and ask but I doubt they would be willing to dispense any advice, lol.

I don't understand how you can put the distinction this way. You can't purchase everything with lindens, nor can you purchase everything with USD. Some things (like tier) are only available with USD, others are only available with Lindens (i.e. if bought in-world). Some may give you a choice (e.g. a landlord or estate owner who takes payment in either Lindens or PayPal).

As near as I can tell, SLX does everything in Lindens. If you think you're using PayPal, what's really happening is that they simply do an implicit linden purchase on your behalf - at an exchange rate that's so bad, it's silly to let the tax considerations push you in this direction. (That's known as letting the tax tail wag the dog.)

In other words, you rarely have a choice in how you pay for things. It's usually dictated by the seller, and when given a choice, you should choose the one that's cheapest.

Either way, it shouldn't matter, as long as you recognize income at the time it's realized (and not at the time it's converted to cash). Remember that barter income is still income.

I'm not even going to try to entertain that one! As far as I'm concerned, it's income once it's converted to USD.

And while I appreciate those still responding to that first post ... please note that the conversation has evolved.

While it works differently in a few other countries, Lindens are not legally income in the US until it is sold for real dollars.

That being said .. does anyone claim the Premium Membership fee as a deduction or just tier?

Hi Ghanie,

From what I can make out the sums we're talking about here are relatively small.

Forgive me if I'm making an incorrect assumption, I'm basing it on your level of query and the sort of low value deductions/expenses you're spending time on.

I think a 10 minute chat with your accountant will set everything straight. If you don't have one you can normally get some free advice by giving the impression that you're looking to engage one

Although the context of SL is a little alien to most accountants, the principles are pretty generic. Out of the 10 mins I mention above, 7 minutes will be describing the concept of what you do in SL and 3 minutes will be the actual advice. (If your accountant takes longer than 7 minutes to grasp the concept then dump him/her - it really isn't rocket science)

At the end of the day you will have the same issues that any other knowledge based business has these days.

SL may be the brave new world, but unfortunately as a business owner you still have to do all the boring old record keeping that RL businesses do in order to make the most of the tax system.

We've already covered the fact that most other in-world expenses can and should be paid with lindens and are therefore not counted as income or deductions. As to the accountant I've alrady spoken with ... he's going to get back to me once he does some research on this whole concept that is Second Life.

This is a discussion on what is and isn't being done in tax preparation in regards to Second Life expenses. While I can get into the complexities of the RL equipment I can and will also deduct, the accountant was capable of handling all of that.

Fair enough Ghanie,

It sounds like you have everything completely under control.

Just be careful that all this cutting edge corporate tax advice you're getting doesn't actually end up costing you more than the income you're worried about.

In my experience a good tax accountant charges as much a day as an SL entrepreneur makes in a year

As I say, hope it all works out for you.

Many thanks. I'm just trying to make sure I have considered all the possibilities and have asked all the appropriate questions. Thankfully, this was part of a free consultation so "advice" hasn't cost me anything yet.

But if taxpayers can share if they deduct their entire membership fee or a portion of it and why .. I think that's my last question, hehe. I guess it's not that big a deal, if someone throws a fit over $75 and succeeds, I'm not about to lose an arm in backtaxes, hehe. Still ... I'm curious ...

What is "unearned income"? That sounds to me like a random gift that you didn't work for; income in SL you are certainly working for.

EDIT: A quick google indicates that "unearned income" also includes investment income like stocks. I suppose one could claim that the money you take out of SL is investment dividends from LL, not compensation from customers, but that strikes me as using the IRS' unfamiliarity with the platform in order to trick them.

Hobby income is simple. 1. Tell them what you made. 2. Deduct your hobby expenses up to the amount you made. 3. Pay tax on anything left over as straight income. You cannot declare a loss from a hobby, they're SUPPOSED to lose money.

If you make a lot of money from your hobby, you should pay quarterly estimated tax payments on that income, rather than wait until year end.

You MAY declare the same income from the same activity as a business. This requires you to fill out Schedule C, and you must be able to produce supporting records. There are two main advantages to doing so: 1. You can take the home office deduction for your business. (Talk to an accountant first, though...this deduction is tricky and can bite you when the time comes to sell your home). 2. If your expenses exceed your income, you can declare a loss, offsetting taxable income from your other sources. (Again, this can be tricky. The IRS can question whether your business is a "real" business unless it shows a profit in three out of five years.)

This couldn't just be as simple as paying taxes on all money you "Process credit" on, could it?


I mean after all thats the money that gets sent to you, kind of like your pay check.


If its going to be anything more complicated than that I wish LL would just go ahead and get rid of the Linden $.

That is the grey area right now, which is why you really need a tax professional (and the IRS) to provide a solid answer. Funds become 'taxable income' once you RECEIVE them. The question that needs to be answered by the IRS is are funds held in your LL account considered "received" or are they only considered "received" when actually transferred to you via PayPal or check.

Merchant Ivory brings up a good point - expect to pay upwards of $300 for someone who really knows what they are doing in the tax field. Avoid H & R Block, Jackson Hewitt and the like. Look for an Enrolled Agent in your area:
http://www.naea.org/MemberPortal/Resources/ForTaxpayers/

what TAx information does LL send you?

Do they give you a return on Lindens converted to US?

How much Process credit they sent out?

How do you even get a copy of it?

I haven't gotten anything at all. I was just going to go by my paypal transaction summary. Luckily for me its not much money to worry about.

LL doesn't send any tax information. They do send emails whenever you process credit, so I keep copies of those messages to refer to when filing my taxes later.

As far as I know you don't have to actually send that documentation along with your Schedule C when filing taxes, you just want to retain the messages in case you get audited (same idea as hanging onto receipts to prove deductions.) Can someone confirm or refute this? Ultimately, these sorts of paperwork details are why I plan to go to a tax professional; I'm really not too concerned about if they have any knowledge of SL specifically.

Should be burried somewhere in my account transactions too, right?

The paypal stuff is easy since i have Bank statements that correspond to it.

I always go -> process credit -> paypal -> bank

My only other thing is I pay my 14.95 a month using Lindens I sell .. have no idea if thats taxable. I could just go ahead and claim that though since its so little.

The latter, Isablan. While I agree that the whole concept of the linden dollar is a grey area, right now the official word is that L$ are not currency. They're a game counter. They're not worth anything until you cash them out. At that point, it's real money and the IRS takes notice.

It's already a profit, that's why I'm paying. I didn't really consider what I do "business" until the money started exceeding tier and then some. I guess when I get a call back, we can talk about business vs. hobby tax. He was hesitant on answering too many questions without looking into SL first and while I was annoyed at first, I am now glad for it ... too many gray areas on where the money goes, how it's processed, and exactly when it's considered "income".

According to all of LL's info on the subject, L$'s are not considered income until it is turned into USD. The only gray area is if the USD in the SL account is income or the money that ends up in the PayPal, although I'm personally counting it once it hits the SL account.

So how many pay hobby and how many pay business among you taxpayers?

If you mean my SL business...well, it's not making a profit yet, we're not even OPEN yet. So the question is moot.

If you mean the small home based part time business I've run for ten years, I've always treated it as a business, even when the income was very small.

Unless you can cite an IRS ruling or court decision to back that claim, I'd dispute it. In the US, bartering income is taxable at the time you receive the property, not at the time you turn around and sell the property in exchange for dollars. In this case, Lindens are a type of intellecutual property, namely a transferrable license. If someone "buys a shirt for 100L$", they're really bartering a license for 100L$ units for a license to use a shirt texture on their avatar.


Depending on circumstances, either or both could be a deduction. There's nothing inherent in either concept that would make one deductible and the other not deductible.

Where do they say this? It would seem an irresponsible thing for them to say, unless they have a ruling to back it up. Normally a company in a confusing situation such as this will have the stock answer "We can't tell you what to declare on your taxes. Consult your tax professional."

All they can do is discuss the rights and responsibilities that both parties have when you obtain a license to use their service.