Tax Questions

The Joint Economics Committee of Congress said so actually. Here is a CNN report on it.
http://money.cnn.com/2007/03/02/technology/sl_taxes/index.htm

The Lindens gave a similar report but lets pick on CNN today.

Some cite the IRS: "[a]n accumulation of ‘points’ would not result in tax consequences, but redeeming or selling them for money, goods, or services would."

But I'm sure you can cite the IRS that supports alien life on other planets. It's all a matter of where to look.

I'm sure it will be an ongoing debate, but as of this time, virtual income only becomes taxable once it's converted into real money/goods.

Of course this can change. But not today and not in the US.

That's not saying that it wont change. I'm sure someone somewhere will attempt something or other. Just listen to the Euros grumbling about VAT. But today ... it's not happening in the US.

Jimmy and Tommy get Whack-A-Mole, the hot new handheld video game, which fell out of their Happy Meal when they turned the french fry bag over.

Tired from fighting in the back of the car, Tommy promises Jimmy that he'll whack fifty Moles to maintain Jimmy's character while Jimmy sleeps off the sugar high, in exchange for one of Jimmy's Mole Power-Ups.

While Jimmy clutches his teddybear and snores in the back of the car, Tommy makes good on the verbal contract.

Upon arrival at WalMart, Tommy is cranky. He didn't sleep like Jimmy did in the car, and in his exhaustion he accidentally drops the Mole Power-Up into an inaccessible Mole Hole.

Jimmy however claims that his part of the bargain was fulfilled, and refuses to renegotiate, citing Mom as a potential judicial avenue in the event of a tort case.

* * * * *

While all this is going on, Creepy Ernie the self-appointed tax investigator peers through the toy bicycles on aisle four, at the two boys he has been trailing ever since he got his Big Mac.

He scribbles in his notebook:

Services exchanged, check.

Taxable moment, 'barter', check!

Work performed, check. Wage taxes triggered!

Mole Power-Up Deliverable, "durable goods" transferred, check!

Sidenote: Child labour issue, investigate further...

* * * * *

Ridiculous, I know. But seriously, "grinding" in an online game is... work, isn't it?

The US Congress is doing the right thing, by making sure they aren't making a laughingstock of themselves by considering all the implications of the virtual taxation situation.

Probably the best advice I have seen in these forums to date!

My only addition is to point out that a Tax ACCOUNTANT will tell you how to comply with the way the IRS wants things to be, and tax ATTORNEY will draw up the boundaries for you the way that the law says it can be drawn!

For example in RL I have two LLCs (A and B), A makes second mortgage loans (HELOC) to B so that B can buy real estate. The interest that B pays on the HELOCS is deductible as a "rental expense", B declares the money as income then reinvests it - often into a loan advance to buy more real estate.

B is owned by my Roth IRA so there is NO tax liability, but A STILL gets the deduction!

Yes it is legal - the judge SAID it was!

It cost me $8000 to set up (plus legal fees), but ...

It also cost me $11,000 for an accountant to tell me it was NOT ok! That is why the judge got involved and the accoutant got to pay the bill!

It all depends on how big your business is, and 1000 other things that a good lawyer will know about but that you and I have never dreamed of!

"The rich have never paid taxes and never will. The poor and middle class have always apid the taxes and always will." R. Kiyosaki (and others over the years)

"Law is what Judges Say it Is. All else is speculation" - Unknown

The rest I leave to your conscience

There is a right way and a wrong way and the IRS way. A good tax lawyer will define YOUR way.

"The US Income Tax is a giant game played for high stakes with a 500,000 page rule book. My job is to pick the rules that suit my client." John Hyre Esq., Real Estate Tax Attorney

"The US Tax code was 100,000 pages before the 1986 "simplification act", that act alone "simplified" it to 300,000 pages." - my Ex who is a CPA!

After some reflection (and my partner beating me over the head with it!) I realized that my situation is hardly typical of most taxpayers. So lets look at what kind of tax advisor you will likely need for some common situations:

1) 90% or more of your income is from employment, pesnion or the like (reported on the US W-2 form).

You need a "filler out of forms" - Turbo Tax, H&R Block (software or "wetware" or the like. These will make sure that all of the information is on the correct form in the correct place and that the arithmetic is done right. Probably 90% of taxpayers fall into this category, everything is very "cut and dried" and any issues or "grey areas" have been trampled over many many times before.

You MIGHT save $20 with a high powered tax guy, but probably won't.

When I was in this category, I used to prepare my taxes by computer then copy the numbers by hand onto the IRS forms - just to show how much I appreciated their "service".

That is about all you can do legally!

Smile, drop your pants and pretend to like it ...

2) You run a small business (RL or SL) that either has a lot of startup expenses or actually (gasp) produces enough of a profit to make a difference in your life.

You will need an accountant/bookeeper to run the business right (YES YOU WILL!!!), that person should know your business well enough that preparing your tax returns will not be much of an added chore.

Mnay small businesses fal because they got into bad trouble without knowing they were in trouble. THAT is why you have a bookeeper and/or accountant, doing your taxes right is an added benefit!

Find someone who has experience with your kind of business, the best ones are known to your trade association or similar organization.

Are there any SL tax accountants out there?

3) You have "significant" investment or "passive" income (stocks, Real Estate, Oil wells etc.)

In this case you will benefit from a good Tax Attorney - the best are both lawyers and CPAs.

My previous post outlines the benefits - a good lawyer can write the rules the way that benefit you the most.

The real secret is to find someone who has income similar to yours (e.g. they invest in real estate).

The "big" question to ask then is: "How much do YOU pay in taxes?"

My Atty/CPS thought for a moment and said: "$1000/year because the IRS hassles me too much if I reduce it any lower."

I found out later that he has over $1M/year in "receipts" (it is only "income" if he wants it to be "income", otherwise ...

He has exceeded my expectations, including handling an audit of my 1996 return during which the IRS not only paid his fees, they agreed that they actually owed ME $70K! Unfortunately I am still waiting to collect on that - they only give "refunds", they don't pay out money

"Death and Taxes may be inevitable in the end, but we see an MD about one and a good lawyer about the other. In each case we can do a lot to affect the time and nature of the result." Karen's "keyboard driver wetware."

My apologies to all the self-righteous Marxists on the forum who enjoy (my) paying taxes - personally I prefer the kind of sharks you find in the ocean.

I'd really like to see the IRS start keeping track on all MMORPG exchanges ...

You consistently betray ignorance by repetitively bringing this up.

If a couple of people have shown a consumer advocate or fairness in business competition attitude it is several orders of magnitude different from being a Marxist.

The way you use the term is no different and no more correct than people calling the Lindens Nazis for banning gambling.

No, you've misread it. What was quoted is "'it shouldn't be taxable,' said Christopher Frenze, executive director of the JEC." Coming from a Congressional committee, this is best read as a statement of what the committee believes the policy should be, not what current tax law requires.


One point for you. But note that a comment by an IRS spokesperson in an e-mail to a reporter doesn't have the same standing as any sort of official decision. The mere fact that he used the term "points" makes it seem like a casual remark without studying the issue. And since he said selling them for "money, goods, or services' would have a tax consequence, that has an implication for when you spend those lindens to buy a script, for example.


Never seen such a thing, and I do read a lot of IRS documents. If you have, let me know.


Please stop asserting this in this authoritative tone. It's simply not responsible to make remarks like this without appropriate substantiation - meaning citing an official IRS ruling, IRS publication, a court decision, or a formal opinion from a tax attorney, tax accuntant, or enrolled agent. (Aside: such opinions are appropriate for the discussion here, but unlike official rulings or court decisions, they're not binding on the IRS.)

There's a reason why I've been referring to barter income here, and avoided phrasing it in terms of lindens. The rules on barter income are easily substantiated by looking it up in Pub. 17, which is the half-inch thick comprehensive booklet for personal income taxes published annually by the IRS, and readily available online.

And, by the way, that would seem to be the opinion of Prof. Camp (presumably a tax attorney, since he's a law school professor), as cited in that same article you quote.

Again, see your own tax professional. "I read it in a forum" isn't going to get you much sympathy from the IRS. "That's what my licensed expert told me" will - at least I'd expect it would help avoid criminal penalties. (I'm not sure if it carries any weight for reducing civil penalties.)

Not exactly. As has been said multiple times, they're worth what their current market value is, with the LindeX and SLX good sources for determing that value. Saying that they're not worth anything is like saying that a collector's edition comic book is only worth the 10 cent price on the cover until you sell it for 10K$ at auction.

As for the IRS taking notice, one thing that hasn't been discussed much is that there's a big difference between "the IRS would consider that taxable" and "the IRS would notice it".

There's a ton of taxable stuff going on in the real world that the IRS doesn't bother to notice. If your kid mows lawns over the summer, makes a few hundred bucks all in cash, and takes the cash to a store and loads up on video games, then the IRS isn't going to notice it. They can't - there don't get any records showing it, and they can't afford to investigate every kid mowing lawns or buying video games. But officially, there's simply no doubt that the kid has earned income for lawn mowing that is subject to tax.

This isn't to say I either approve or disapprove of this. It's simply a fact of life. Likewise, I think it's clear that the IRS is highly unlikely to force the average SL business operator to pay taxes on Lindens, not because they think it's not taxable (which remains a grey area), but because there's no easy way for them to find out about it.

This is a good point too.

You would think their first concern with Second Life and other Online cash-outs would be to get people to pay taxes on money they did cash out, since I'm positive theres a ton of people who don't.

Exactly .. it was the preliminary results of a study, meaning they haven't quite made up their minds either way. This is our tax dollars hard at work; they're actually getting paid to research and debate the issue ... not for a weekend retreat either, this was last March when they were already well into the study.

I still see nothing that indicates the bartering clause to definitively apply to video games or even SL. All I've seen are warnings that the IRS could possibly use that argument to step in that direction. But there is no law or ruling to this affect at this time.

You want proof that it doesn't say so? I thought you were well read on IRS regulation; prove that it does.

I'll start proving that no one has solved the Riemann Hypothesis yet since that is more up my alley.

Gosh, there are a ton of people who don't pay taxes on any income! You'd think they'd have enough on their hands without trying to attack the virtual world.

Its quite common for waitresses for example to only declare tips that bring them up to a certain wage, depending on the restaurant as low as minimum.

And just keep the rest.

heck of a lot more tipped employees in the US than virtual content makers.