Is Second Life a tax shelter?

In addition to reporting income, you should also be sure to deduct business expenses. I have an accountant who does my taxes and I report all SL income and expenses to her, including computer equipment purchases necessary to run the business.

I recently contracted with a sim developer for a sizable amount of work in SL. He requested that I file a W-9 form with him, otherwise he would be required to deduct "backup withhold" 28% from the payments he makes to me. The W-9 form essentially says he does not have to deduct "backup withholding" from me because I report and pay my taxes annually. I investigated this on the Internal Revenue website and it does in fact seem to be a requirement.

Which makes me wonder why Linden Labs does not have to do this same thing.

Oh, yeah, right. That's the downside of it being a business.

I don't remember ever seeing $500 cited specifically, but that doesn't mean it's wrong. Do you know if that $500 is a hard point that factors into the decision of whether or not something is a business or a soft point that simply raises the flag causing the IRS to look more closely?

Note that the quarterly estimated payments aren't really specific to business income. If you have a lot of gambling income, for example, you'll probably need to pay estimated taxes.

That $10K amount is related to money laundering, not taxes (though tax laws are often used as a way to prosecute money laundering, just as they were used to prosecute Al Capone).

Yes, I agree that LL isn't reporting this stuff to the IRS at this time. But again, so what? In the US, you are liable for income tax on all income, unless it's from a source that's explicitly excluded (like municipal bonds or gifts). The only way it matters whether or not the other person actually notifies the IRS about your income is for the question of how likely you are to be caught.

From what I remember, $500 is the amount of self-employed business income that will require payment of self-employment tax (i.e., the taxes for social security that are paid by the employer when you have W-2 wages). So reporting "other income" over $500 with no supporting documents (like a 1099 form that's issued for gambling winnings over a certain amount) is more likely to raise a red flag as to whether you're reporting it correctly.

I also recall $500 being the magic number for estimated tax payments. If you expect to owe the IRS $500 or more in taxes for the year, including self-employment tax, you're supposed to be making estimated payments to avoid penalties.

It looks like a tax shelter to me.

As least for the US. The point in which your profits become income is the point where you cash out of SL. So if you keep your money growing inworld, no taxes.

Funny thing about the tax depts. When they receive a complaint, they usually check out the person making the complaint too.

Not a tax shelter.

I'm smart enough not to try to give specific tax advice in Resident Answers because people are *very* likely to misinterpret it - my circumstances are almost certainly different from everyone else.

However, I'll say this: if you are in the United States making as much as mentioned and haven't gone to see a professional tax accountant yet, you may be in for trouble.

The most important part I was advised about when I checked it out: Taxation comes in many flavours. There are different taxes on work performed than there are upon investment income. In the United States, with regard to taxes you aren't innocent before proven guilty - if you seem to be dodging social security or medicare payments, you'll have to show why you shouldn't be paying these. Stuff like that.

I wouldn't mess with the US IRS - they know people make mistakes, they are very helpful to anyone who tries to sort things out, but god help you if you try to evade taxes. And the longer you go before caught, the greater the fines and past penalties.

Well in my mind the real question is "does LL report your transactions to the IRS?" If they did, I imagine this would only be for cashing out (from your USD account to your PayPal), but I'm almost certain they don't report anything to anyone.

In the USA at least, anyone who gives you money (your employer, the lottery, whatever) needs your social security number in order to report income earned. No one has given LL their SS, so LL can't report against you even if they wanted to. Add to that the fact that when you DO cash out, you simply provide them a PayPal email address. You don't give them any credentials other than that- for all they know you're sending the money to charity.

They don't report your earnings because they can't.

Now, someone already mentioned this- there IS an income threshold where the IRS would very much like you to begin reporting. $2000 USD/mo is definitely above that threshold, so it is reportable, but it's on the honor system.

I don't think the worry is the Company reporting you, but if paypal pays to your bank account, your bank account is going to be tied to all your info and the incoming paypal transaction would trigger the report. Even if the Company sends you a check, unless someone converts it to literal paper money cash for you, there will be a clear income trail.

And if anyone tried to help launder the money like that, then *they* would have to take the paypal income or cash the check, and the income reporting would be on them...

I think the "hobby" threshold is 400 dollars a year.

Payouts you take through paypal are reported to the IRS if its higher than 500 a month.

If you take checks, I'm sure LL has records of that as well. I haven't read anywhere if they report those amounts to the IRS or not...I would guess above a certain threshold they would be required to report.

Very good point. I wasn't thinking any further than LL. PayPal and your bank will definitely register on the IRS's radar.

EDIT: /me gulps and realizes it's time to keep better records.

A wise woman who has tangled with IRS on more than one occasion AND WON gave me an important piece of advice: Never argue with the IRS over income, argue over deductions. You have no chance of winning a fight over income when they can access your bank accounts, credit cards and anything else with a paper trail. You at least have a shot at winning on the legitamacy of your write offs.

Well said Angel. But not actually going to claim a loss. Its a Work in Progress set up with credits and debits. So the expenses are there in my reg corp tax and the transactions are there in the Work in Progress part and as I understand it, Rev Can knows it can take 3-5 years to show a profit..hopefully I will do so before then. So it is useful as an expense against my RL income in my corp.

This is probably boring to the rest of you so I will stop there...

wow that's insane. i never knew you could make real profitable money like that.

That looked like a hypothetical situation.

I don't think he is really making that kind of money.

Ok, after reading yours, and others posts i see how SL Could also be describes as a Tax Shelter, The Money can remain Protected within the system, and Traded also, Gains and Losses made, and all Outside the tax Structure Until it is Cashed out.

So, Yes, a Tax Shelter, But Whether Losses are Deductable, or No is Up to the Taxation authorities.

Angel.